Why I believe gold should be part of a recession-proof portfolio

I recently saw an article on the Motley Fool that argued that investors should avoid gold during a recession. Today, I want to present the opposite view.

Uncertainty matters more than inflation

The piece noted that although gold has performed well during recent inflationary periods, right now we are looking at a period of deflation, and therefore gold should not be expected to perform well. 

I am broadly sceptical of the ability of anyone to predict macroeconomic trends and changes in factors like inflation. Regardless, the conventional view on gold is that it is a hedge against inflation, specifically against a fall in the value of the dollar. Whilst this is somewhat true, the two do not always move in different directions – for instance, in a volatile environment where investors seek out safe havens in US Treasuries, both the dollar and gold rise in value. 

My view is that gold should be seen as a hedge against uncertainty, rather than inflation. When stocks lose value in volatile or recessionary times, what you want is an asset that is inversely correlated that move. The question of inflation versus deflation becomes less important.

Investing in gold

If these arguments ring somewhat true for you, your next question may be: “How do I gain exposure to gold?” There are a number of ways to do so, and they can be sorted along a spectrum of how far away from the actual gold you want to be. 

At one end of this spectrum is bullion – holding physical gold. This allows you to always have it on hand. The downside is that storing gold is a hassle – it is heavy and bulky, and if you want to keep it in a bank vault you will have to pay for that. One interesting way to hold physical gold is to invest in coins – the most common of which will be valued close to the price of the metal itself. 

You could go a little further and buy rare coins that are priced at a premium to the cost of the base metal. Coin collecting has become increasingly commoditised in recent decades, with standardised quality grades and extensive catalogues making it easier for non-experts to get their money’s worth.

Then we have gold certificates. These are redeemable for physical gold at the request of the holder, and, therefore they are the next closest thing to holding the actual stuff. Additionally, storage becomes a non-issue. 

Still further away we have gold ETFs. The advantage of these is that they are very liquid instruments, although they cannot be converted in the same way that certificates can.

Finally we have the gold mining stocks. Personally, I don’t view holding these as a particularly good hedge against volatility, as there are numerous other factors that determine the value of a mining stock. Additionally, the industry is notoriously difficult to navigate for non-insiders – mines are often located in far-off countries and disclosure is opaque. 

I am not suggesting that you convert all of your net worth into gold. I understand that gold does not pay a dividend, nor is it likely to double in value overnight. But there is definite advantage in owning an asset that you know will continue to be worth something tomorrow, next year and next decade.