Considering gold to combat recession risk

After a great start to the year, gold prices remain steady and could provide an opportunity for investors looking to protect their portfolios against a recession. 

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“Generally speaking, we see upside potential in the coming months as market uncertainty appears to be increasing,” said Daniel Greenspan, senior analyst and resource team director with CIBC Asset Management, in a late-June interview.

Gold was trading above US$1,800 this week, roughly where it started the year after rising above US$2,000 in March.

Inflation, interest rate hikes and macroeconomic risks are typically supportive of gold, Greenspan said, both as a hedge against inflation and a safe asset. 

“Gold’s role as a flight to safety and a hedge against recession risk should help support the price in the current macro environment,” he said.

During this year’s dramatic swings in equity markets, gold can also serve to dampen the volatility in other stocks, he said, and the commodity tends to perform well during periods of greater political risk.

The Russia-Ukraine conflict has created risks on the supply side, Greenspan said, while China’s zero-Covid policy has created risks on the demand side with large-scale lockdowns impacting a significant number of its citizens.

With these uncertainties impacting the global economy, Greenspan expects the gold price to be supported as investors look for safe assets.

That said, there are a few factors that have contributed to gold prices not performing as well as they could, Greenspan said. 

First, there tends to be an inverse relationship between gold and the U.S. dollar, so the greenback’s recent strength could remain a headwind to gold. 

Further, resource-focused investors have generally seen better returns in energy and the base metal sectors compared to gold. Attention could shift to gold if energy and base metals suffer during a period of uncertainty around recession risk, Greenspan said. 

He likes companies such as Agnico Eagle Mines Limited, a high-quality, Canadian-based senior gold producer, and Franco-Nevada Corporation, a gold-focused royalty and streaming company with a diversified portfolio of cash-flow producing assets.

Given that Franco-Nevada is not a producer and therefore has minimal operating costs, Greenspan said it has almost no exposure to inflation and is an attractive investment in an environment where producers are experiencing inflationary pressures on capital and operating costs.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.