Gold in Past Market Stress: What History Suggests — and What It Doesn’t
Many investors treat gold as a hedge against inflation, economic uncertainty and other market stressors that can weigh on the stock market. Much of that can be attributed to the precious metal's lack of correlation with stocks, which implies that gold and other precious metals can rally during stock market corrections and thereby minimize investors' total losses during bearish stretches.
Gold has endured many tests, and sometimes it has passed with flying colors. Precious metals have rallied when the rest of the market was pulling back, but gold doesn’t have a 100% success rate.
If you are considering a gold IRA or other gold investments to help diversify your portfolio, here’s what history suggests about how the precious metal performs during times of market stress.
Inflation is a major catalyst for gold prices
Just a few years ago, investors saw their growth portfolios tank. It was 2022, and inflation touched 40-year highs. The Federal Reserve hiked interest rates to curb inflation, and while elevated rates reduced consumer demand for various products and services, high inflation remained a key story of that year.
Gold only gained 1% in 2022, but that was the same year the S&P 500 dove by 19%. The Nasdaq Composite — a tech-heavy benchmark with a strong focus on growth — plummeted by 33%.
Looking further back, gold surged by more than 2,000% throughout the 1970s, with a decoupling from the U.S. dollar and rampant inflation from oil crises acting as decisive economic forces that fueled a gold rally.
The S&P 500 didn't fare nearly as well, plunging by 15% in 1973 and then by another 26% in 1974. Those consecutive drops minimized the impact of a 37% rally in 1975 and a 24% gain in 1976. The S&P 500 had three negative years throughout the 1970s, and only two years with gains above 20%.
High interest rates can crash gold prices
Although inflation led to an incredible gold run, the Fed clamped down in the 1980s and set interest rates that almost touched 20%. That was enough to get inflation under control, which resulted in a gold price crash. The precious metal lost almost 70% of its value from 1980 to 1982, while the S&P 500 posted one of its best decades in history.
Market stressors can create opportunities for gold, but if the Fed and other entities eventually address the issue, it can lead to a prolonged downturn for gold. The same scenario played out in 2008 amid the Great Recession. Gold gained value in 2008 and 2009, when the S&P 500 and Nasdaq Composite were reeling.
A few years later, the Fed announced it would pull back from quantitative easing. This decision reduced inflation and pushed down gold prices. The precious metal produced negative returns each year from 2013 to 2015, but those were good years for the stock market.
The dot-com crash provides more insights about gold prices
The dot-com crash was another notorious stretch for the stock market that featured a strong gold rally, but the context behind this crash is quite interesting as it relates to gold. High interest rates contributed to the crash, but the main focus was on stock investors buying unproven, debt-ridden companies with lofty valuations.
The music stopped as heralded startups filed for bankruptcy and were delisted. This was a time when Mark Cuban was able to sell Broadcast.com to Yahoo for $5.7 billion despite the company being unprofitable. Overstretched valuations and poor business fundamentals set the stage for a massive stock market crash.
During that crash, many investors retreated to gold, which maintained its status as a reliable safe-haven asset and a hedge against economic uncertainty and downturns. It’s also interesting to note how the Fed responded to the event. The central bank aggressively cut interest rates after maintaining high rates for years, which led to higher inflation. That was the perfect environment for gold to thrive. The precious metal gained 1% in 2001 and 24% in 2002, compared to a 13% loss for the S&P 500 in 2001. The same benchmark also shed 23% of its value in 2002.
Gold’s winning streak continued for the entire decade, even amid the Great Recession. The asset posted its first year of negative returns in 2013 after more than a decade of being in the green. Gold currently has a similar win streak, posting positive returns each year since 2022.
History suggests a multi-year losing streak is possible once gold loses its momentum, as investors saw in the 1980s, 1990s and 2010s. Meanwhile, the S&P 500 has only had one stretch of consecutive negative years since the 1980s. Those years were 2000 to 2002, which correlated with the dot-com crash.
Gold price momentum doesn't last forever
For the most part, gold was a low-volatility asset that barely budged in price until President Nixon removed the U.S. from the gold standard in 1971. Heightened volatility was normal throughout the 1970s due to this change and the economic backdrop of stagflation and oil crises.
The crescendo occurred after gold prices more than doubled in 1979. But that dominant year turned out to be the last hurrah for quite a while. Gold sank in the 1980s as the stock market soared, but that wasn't the end of gold rallies. The precious metal rallied during the dot-com crash and during the Great Recession, which is quite the opposite of how stocks performed.
Gold's history demonstrates that it is a strong-performing asset over the long term and can act as a hedge against stock market corrections. However, it's not the best asset to chase. Once economic uncertainties and inflation that are spiking gold prices fade into the background, precious metal prices tend to drop sharply.
Gold’s declines also tend to align with stock market rallies, making it even worse to buy at the top. Viewing gold as a speculative investment that will keep going up isn’t the right way to approach this asset class. It should be part of a diversified portfolio, and many experts recommend allocating no more than 5% to 10% of your holdings to alternative assets including precious metals. That way, you get a valuable hedge that won’t weigh too much on your net worth when the stock market rallies on good economic news.
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