Investors and speculators alike are increasingly turning their attention to gold—and for good reason. Over the past two years, gold has surged by over 40%, outperforming even the S&P 500. Often viewed as both an inflation hedge and a safe haven during geopolitical uncertainty, gold continues to make it’s case for inclusion in investor’s portfolios.
Many recently have also pointed to gold’s historical performance when the Fed begins cutting rates. For instance, after the last rate cut that occurred in 2019, gold jumped nearly 40% over the following 12 months. But is gold always a good investment after the Fed begins a new monetary easing cycle? Let’s take a look at the data.
One thing is clear—not all rate cuts are created equal. The economic context, particularly whether a recession follows within a year of the first rate cut, can significantly influence gold’s longer-term performance. When reviewing easing cycles since 1980, the differences in gold’s performance based on whether a recession occurred or not are stark.
In the short term, gold tends to outperform regardless of whether a recession follows the rate cut. The median return for gold six months after a rate cut was 6.8% without a recession and 6.5% with one.
However, the 12-month performance tells a different story. Without a recession, gold’s median return over that period turns negative, at -1.3%. But when a recession follows, gold’s return comes in at 12.5%.
The takeaway? In the short run, gold looks well-positioned to continue its outperformance, regardless of recession risks. However, based on history, longer-term returns become more path dependent and gold’s return profile might look very different based on whether we see a recession materialize after the Fed begins cutting rates or not.
