Protecting Your Wealth in Shaky Times: A Guide to Recession-Proofing Your Portfolio with Gold
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What Goes Up Must Come Down
What goes up must come down. That’s one reality that every economy faces: Recessions are inevitable.
Causes of Recessions
When economies and asset values become overheated, any number of factors can cause them to fizzle, whether that’s due to geopolitical conflicts, slowdowns in consumer spending or insurmountable inflation.
Preparing for a Recession
And while it’s impossible to know for certain when the next recession will happen, it’s possible to prepare for one. Gold is a time-tested precious metal that can help portfolios withstand the impacts of financial recessions.
Why Gold Tends to Perform Well During Recessions
During recessions, people often retreat to investments that are less volatile and offer more safety. These investors often sell their stocks and stash their cash instead of deploying funds into assets that can gain value despite a recessionary environment.
Gold gains value during economic cycles that feature high inflation and geopolitical unrest. Any uncertainty or economic setbacks can force governments to create stimulus packages that stir up inflation. And while fiat currencies can quickly lose value during a recession, gold historically remains steady, which is why it is considered a safe-haven asset.
Benefits of Gold Investments
Gold is used across many industries, has a limited supply and is considered to be a store of value as a medium of exchange. Governments can print more fiat currencies, but they can’t print gold. As more dollars go into circulation, each dollar’s purchasing power decreases. Therefore, investors have to commit more dollars to purchase gold.
Therefore, having a small position in gold before a recession occurs allows you to enjoy the upswing once conditions worsen. The gains you could potentially see from your gold investment can offset some of the losses you incur from other assets, such as stocks and real estate, which is why gold and other precious metals are considered ideal assets with which to diversify a portfolio.
Other Assets that Minimize Your Losses During Recessions
Physical Gold
When you buy physical gold, you will have complete ownership over the asset. You are responsible for storing it and getting it insured, but you own it outright.
Gold Stocks
These stocks offer exposure to gold, but you also get exposure to a company’s financials. Many gold mining companies have underperformed gold in the long run, but some of these companies pay dividends while owning physical gold does not produce yield. These companies can also perform poorly during recessions, even if gold gains value; however, gold stocks are also more liquid than physical gold.
Gold ETFs
Like gold stocks, some gold exchange-traded funds pay dividends. They are either backed by physical gold holdings or offer exposure to a basket of gold mining stocks.
Gold IRAs
When it comes to a gold individual retirement account (IRA), a custodian will handle gold storage and insurance for you. Gold IRAs tend to have higher fees than conventional IRAs that let you purchase equities rather than hold alternative assets (such as gold or real estate).
Diversify Your Portfolio with Gold
Accumulating gold may be a great way to diversify your portfolio, especially if you have significant exposure to stocks and real estate. Precious metals can mitigate recession losses and gain value during economic uncertainty.
Other Alternatives
High-Yield Savings Accounts
These savings instruments may sound like good options, but interest is taxed as ordinary income, whereas gains from most long-term gold investments are taxed as capital gains.
Bonds
U.S. Treasurys and corporate bonds can pay respectable yields when interest rates are higher, but those payments are treated as ordinary income, and like high-yield savings accounts, rates fall alongside the Federal Reserve’s benchmark interest rate when cuts are made.
Defensive Stocks
Buying defensive stocks that sell essentials can result in a steady portfolio of continuous dividend-payers. The sectors these stocks fall into include consumer staples and utilities — think wants over needs.
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Beginner’s Guide to Investing in Precious Metals
