Gold has been on a tear with its price jumping over 50% in the last one year. In international markets, gold crossed $3,000 an ounce on March 14, while in India, gold rate today is Rs 87,970 per ten grams.
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The recent surge in gold prices is due to the R-word – recession, which now seems to have taken centerstage.
We will come back to this later, but first, what else is driving gold.
Historically, gold has always been the investor’s go-to asset class when there is uncertainty. Now, there is a greater sense of uncertainty in world affairs following President Trump’s return to office.
Dollar and Gold
Trump’s tariff policies, in particular, are looking ominous to global trade. The dollar and gold are at the heart of a currency and trade war that is simmering beneath the surface.
In fact, it would be fair to say that a global trade war has begun.
Trump fired the first salvo by imposing tariffs on imports from Canada, Mexico and China. Acting swiftly, these three nations and now even the European Union announced counter tariffs on US imports. This all-out conflict will take center-stage after April 2, when Trump’s “reciprocal tariffs” go into action.
Tariff Policy
The big shake-up in the financial markets was waiting to happen. Trump, being as vocal as perhaps anyone in his position can be, said he is not ruling out a recession as a result of his administration’s tariff policy changes.
Trump called the present economic phase a ‘period of transition’. As a direct result of that statement, $4 trillion was wiped out off in the stock markets. Trump retracted on his views later but the damage was already done.
But what has recession got to do with gold price? Let’s see.
Gold’s out-performance during recession is logical as investors seek safe havens during crisis. Also, during a recession as governments print money to jump start the economy, expected inflation increases leaving gold as the only asset that acts as a solid store of value.
A recession results in a significant decline in value across various sectors, including currencies, stock markets, real estate, and property. This decline in values often leads to further money withdrawals, thus potentially triggering a downward spiral.
Why do values decline?
A recession is a period when the economy actually shrinks. There is degrowth. And when that happens, most people are worse off.
Consumer confidence is low because people are not sure about future prospects. This triggers a slowdown in spending, hurting businesses. As a result, businesses suffer. And finally, government tax revenues take a hit.
This downward spiral feeds on itself, making things bad to worse. Unless of course, the government steps in to break it.
One way governments deal with this is to print more money. This, over time, leads to inflation, and sometimes when things go out of hand, hyperinflation. Inflation, as per the basics of personal finance, leads to a decrease in the purchasing power of money.
Here in comes the importance of gold as it serves as a valuable store of value and an asset to rely on during times of crisis. Eventually, generally speaking, during a recession, investors holding gold find the value of their gold intact or higher compared to any other assets they hold.
Of course, the way the markets work is more complicated than this, but this is one correlation that holds true from time to time.
Recession, Rates and Gold
The chaotic implementation of Trump’s tariffs is already causing economic risks to businesses. The recessionary risk is present not only in America but also in other countries. On March 13, Bundesbank warned that U.S. tariffs could push Germany into recession.
Former US Fed Chairman Bernanke had said, gold prices can act as an indicator of the health of the economy. A rise in the price of gold may be a signal that the economy is struggling.
Many gold experts believe the current price has factored in burning issues from a recession to trade wars. What will determine the price of gold in the next nine months of 2025 is the uncertainty around these factors.
As the saying goes, ” When the going gets tough, tough gets going,”
In the present scenario, it could be, “When the going gets tough, Gold gets going…”
