Does Gold Hedge Economic Downturns?

Some investors may view gold as a risk management asset. While its returns have been too volatile to serve as an effective safe haven or inflation hedge, some may view it as an asset to weather an economic downturn. But there’s not much evidence gold can fulfil this purpose.

Plotting quarterly gold spot price returns against US gross domestic product changes reveals little relation between the two. Whether gold was up or down doesn’t appear connected to what was happening in the economy. Gold did gain in value during the 17 of the 28 quarters with negative GDP growth, but so did US government bonds.¹ So, an investor with high-quality fixed income in their portfolio likely already has a measure of protection against economic contractions.

Markets tend to reflect expectations for the macroeconomy in advance. It’s not clear that adding a slug of gold to one’s portfolio provides additional protection against adverse economic developments.

Exhibit 1

1. Based on the Bloomberg US Government Bond Index. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Bloomberg data provided by Bloomberg.

By Wes Crill, PhD, Senior Client Solutions Director and Vice President
Dimensional Fund Advisors

Performance data shown represents past performance or simulated performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

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