A Look Back on Gold: 2008 vs 2020

As the pandemic is worsening with no end in sight and the economy with it, many are looking towards safe havens, the biggest of which is Gold. There are many reports of Gold being the way to go, especially when trying to draw parallels from the past. Most notably, the 2008 global financial crisis. But is it really comparable? And if so, what should we be prepared for?

In terms of scale and pace of decline, our current crisis is much broader and deeper, hitting practically the entire world, not just advanced countries, and also all offline sectors, not just finance and construction. A more harrowing comparison is the US unemployment rates: 22 million Americans have claimed unemployment benefits in just four weeks, compared to 37 million claims filed during the 18-month long Great Recession. During that time, Gold prices rose steadily in spite of economic shambles. The more negative news on economic growth, the greater the Gold price increase.

Unsurprisingly, the severity of the current crisis will be much larger than the Great Recession. Going beyond an economic crisis, what we have now is an economic lockdown, making it a profit crisis on top of the historically prevalent liquidity crisis. Without profits, companies will lack the funds for investment, suggesting a large effect on the rise of Gold prices.

The one caveat, however, is the duration of the crisis. The Great Recession lasted a year and a half, if the current crisis will be deep but short, the overall damage might be less severe comparatively. If so, the positive impact on Gold might be negligible. However, the more likely scenario of a changed world, a new normal, social distancing will continue to stay in place and the economy will not return to full capacity for years on end. In this case, monetary policies and interest rates will not normalise for a long period of time, a sign supporting Gold prices.

Unlike the solely financial crisis of 2008, this current crisis is a health crisis, meaning central banks are helpless. Now that financial institutions can only address secondary repercussions, economic decline is hard to avoid and thus, a stagflation is likely to occur. As both supply and demand lower while corporate and public debt increases, causing inflation. Widely considered an inflation hedge, Gold will then stand to have much more to gain.

Investors are advised to be cautious, as uncertainty can push Gold to either direction. In summary, low economic growth and low interest rates is a sign of an increase in Gold prices. However, if the current uncertainty is resolved quickly, gold prices are likely to fall, as seen during the bull period of 2011-2018.