Is the major recession many analysts have predicted now upon us? Early last week, it seemed likely: Unexpectedly, unemployment in the United States surged, triggering a historically reliable recession indicator. Within hours, top stocks like Nvidia (NASDAQ:NVDA) and Apple (NASDAQ:AAPL) plummeted by dozens of percent, and the cryptocurrency market experienced its most severe sell-off of this cycle.
Fear of an economic downturn in the United States compounded with panic over the apparently out-of-control Yen-Carry Trade, which threatened to trigger stock sell-offs worth trillions. As stock prices melted down, many investors wondered: Where should I put my savings if the worst happens?
History shows that gold has generally been a safe bet during recessions. Silver has also performed well in most crises, though it is much more dependent on economic conditions, especially in the industry.
But why is gold considered the ultimate safe haven? Is this reputation justified? And could Bitcoin, the so-called digital gold, achieve such a status?
US Dollar -85%, Gold +7500%
During economic crises, investors traditionally seek steadily growing asset classes to protect their money against both inflation and severe price fluctuations.
Gold has proven particularly stable over decades, with its performance during past recessions impressively highlighting its role as a store of value. Its reputation was particularly bolstered by the recession from 1973 to 1979 after the gold standard was abolished and today’s fiat system was introduced. During the 1970s, inflation in the USA averaged about 8.8 percent annually, while gold prices increased by an impressive 35 percent each year.
In times of high inflation and economic uncertainty, gold has demonstrated its potential to act as a shield against a loss of purchasing power. Due to inflation, the US dollar has depreciated by a factor of 6.7 since 1970, losing about 85 percent of its purchasing power. An item that cost $50 back then would cost around $340 today – and rising. Over the same period, the price of gold has increased seventyfold.
Gold also shone during the 2008 global financial crisis as a safe haven for investors. While the stock market lost more than 37 percent of its value during this crisis, the price of gold rose by nearly 50 percent. This performance underscores gold’s resilience during crises and solidifies its image as a reliable investment in times of extreme financial uncertainty.
The psychological factor that makes gold particularly attractive during such phases is the flight to safety. Investors tend to revert to proven values in times of uncertainty – and gold, recognized as a store of value for millennia, fulfills this role due to its enduring stability. Mass psychological dynamics also lead to an inverse correlation between the gold price and global markets during major economic crises. When many believe that gold can save them from crisis and currency devaluation, demand for this noblest of metals is high – and so is the price.
Gold Shines in Crises – What About Silver?
Thus, an upward spiral emerges. During economic crises, a lot of capital is in motion and in search of safe assets. This also boosts the growth potential for assets considered safe – especially if they are scarce. This is true for gold: No other commodity or asset is as widely recognized and accepted as a safe haven.
Gold also benefits from its physical scarcity and traditional perception as a store of value. This psychological impact is intensified by the fact that gold, unlike paper currencies and stocks, is not influenced by inflation or financial crises. For instance, during the recession of 2000-2001, marked by the Dotcom bubble and subsequent market crash, the price of gold rose by more than 20 percent, while the S&P 500 dropped significantly.
Gold not only shines as a long-term investment but also as a relatively short-term protection against economic turbulence.
Silver has also proven to be an interesting investment during economic downturns, though with mixed results. During the 1973 recession, triggered by an oil price shock and inflation wave, the price of silver rose by more than 40 percent. In contrast, silver experienced a price decline during the economic weakness of 1990, influenced by the global economic situation and political conditions.
These differences show that silver’s performance during a recession is significantly influenced by the specific economic situation and demand in the industry. The economic calamities of the 1990s were preceded by Black Monday 1987, the first major stock market crash since World War II. On October 19, 1987, the North American industry index, the Dow Jones, fell by 22.8 percent, sending the US industry into a downward spiral.
It is no surprise that the price of silver also came under considerable pressure simultaneously – after all, silver as a key industrial raw material is particularly in demand when the manufacturing sector is thriving. The industrial use of silver is diverse, including the production of electronics and solar cells. It is no coincidence that China and the USA compete in global markets for available silver stocks.
In times of economic uncertainty, decreasing industrial investments can suppress silver demand and thus the price. The performance of silver during economic crisis phases is therefore variable: During the recession of 1981, the silver price rose by 17.5 percent, although the overall economy was marked by high inflation rates and a restrictive monetary policy. In contrast, the silver price fell by eight percent during the 2008 global financial crisis, even though the gold price increased significantly during this time.
Is Bitcoin Already Digital Gold?
In recent years, Bitcoin has positioned itself as a digital counterpart to gold and shows potential to play a similar role as an economic hedge. Larry Fink, CEO of BlackRock, commented very positively last fall during the latest major crypto market rally about the potential role of Bitcoin as an alternative to gold.
In an interview with Fox Business, Fink noted that the Bitcoin rally was not just due to the rumors circulating about the approval of a now-approved spot ETF, but rather a general flight to safe and intrinsically valuable assets.
Fink said, “I believe that more people are drawn to quality assets, including government bonds, gold, or crypto. I believe that crypto will play this role as a flight to quality.” Indeed, Fink referred to Bitcoin as “digital gold” and emphasized that it could serve as an “alternative” to government-controlled currencies.
How Do You Protect Your Money from Recession?
A key argument for Bitcoin’s role as digital gold is its limited number of 21 million units and its deflationary structure, which can support its value in the long run. These features are comparable to the limited natural resources of gold. Since the approval of Bitcoin spot ETFs in the USA in January, institutional interest in Bitcoin has increased, which could further stabilize its price in the future.
However, the possible image shift from a high-risk asset to a safe investment amid macro-turbulences may still take some time. For instance, the high volatility of the Bitcoin market is a significant hurdle, making it less attractive to risk-averse investors.
While gold convinces with its stability in times of crisis, Bitcoin can exhibit extreme price fluctuations, making it harder to act as a reliable safe haven. The historical performance of Bitcoin in economic downturns is still limited, complicating a definitive assessment of its ability to hedge against economic downturns.