Is a Bear Market the Time to Invest in Gold?

Global stock markets have endured a tough start to the year after concerns over how long the Federal Reserve and other central banks would keep hiking interest rates. 

This has now triggered a collapse in confidence in the banking sector, with the failure of three US banks, and emergency measures put in place for a fourth one, while in Europe, Credit Suisse has been the subject of a rushed buyout by UBS.

Equity prices have stumbled, with banking stocks hit particularly hard; gold has been one of the few beneficiaries, with its price climbing up towards $2,000 an ounce. 

However, is a bear market the best time to invest in gold? How does gold perform at other times?

Understanding bear markets and gold investments

First of all, it is worth stating what constitutes a bear market. A bear market is when a stock, index or commodity has fallen 20% or more from its most recent high, with the expectation that the market is continuing to fall. 

The term bear refers to the way the animal attacks its prey or rival by standing on its hind legs and swiping down with its paws. The bear is therefore the symbol of a falling market while a bull, which strikes upwards with its horns, is the emblem of a rising market.

Gold has traditionally been viewed as a good asset to hold at times of falls on equities as it is considered a safe store of long-term value with little correlation to stock market drivers. 

Certainly, the recent chaos among banks has reminded investors of physical gold’s lack of counterparty risk in contrast to investors’ worries about whether they will get their money held with one of the collapsed banks back. 

Pros & cons of investing in gold during bear markets

Not all bear markets are equal so it is important to consider the reasons why a stock index may be falling before considering whether gold is the right investment choice.

For example, last year’s series of rate hikes by the Federal Reserve saw growth stocks, particularly those in the tech sector, drop in value. Businesses built on borrowing cash in the hope of delivering future profits became less attractive when the cost of servicing that borrowed money started to rise sharply.

However, rising interest rates can present a negative factor for gold as the precious metal’s lack of yield compared with interest-paying assets such as bonds has a tendency to lessen appeal among investors. More recently, the collapse of Silvergate, Silicon Valley Bank and Signature along with close shaves with Republic and Credit Suisse is a bear market much more conducive to gold ownership.

For investors looking to add to their exposure to gold, it is worth considering Kinesis gold (KAU), a gold-backed digital asset. KAU is backed on a 1 for 1 basis with gold physically held in secure vaults and combines that with the ease of a modern-day digital currency that can be used for everyday spending. In contrast, to purely physical gold, KAU also pays holders a monthly yield for using the currency over the course of the previous month with their Kinesis card.

What to consider when investing in gold during bear markets

Gold is an asset worth holding a small portion of in any investor’s portfolio at all times for the diversification it provides through its lack of correlation to stock markets. Therefore, rather than buying gold during bear markets, it is best to have gold already in a portfolio to protect wealth when equities take a tumble.

That said, gold can still play a role for investors once a bear market forms, particularly if there is the prospect of markets continuing to fall. Gold has proven to be a good store of value over centuries, having endured countless human conflicts and stock market bubbles, making it a sensible option for parking money while waiting for the financial storms to pass. It is this haven quality that sees gold in so much demand at times of crisis.

Gold price predictions for 2023

Gold has experienced a comparatively volatile opening quarter of the year so far with strong gains in January followed by a slump in February that brought it back to where the price had started the year. Conditions have been far more conducive in March with gold topping $2,000 an ounce when fears over the health of the banking sector were at their strongest.

As ever, the Federal Reserve will have a crucial role to play in determining gold’s performance this year. If rates continue to rise for a few months yet then gold will struggle to achieve the highs it reached in March. However, if the US central bank were to pause its hikes earlier than anticipated, particularly if this was prompted by the continued contagion of banking failures, then the potential ceiling for gold is much higher and it could even challenge the highs of 2022.

Offering an outside view, StoneX Metals and Energy Markets Annual Outlook released earlier in March showed gold enjoying a strong 2023, gaining 14% to reach $2,070 an ounce by the end of the year. Others however were more cautious with Commerzbank concerned about the impact of rising US central rates causing gold to fall towards $1,800 in the second quarter before recovering to $1,950 by the end of the year.

Is investing in gold during bear markets right for you?

It is important to have an investment strategy that works in multiple different market scenarios rather than investing solely to benefit from a bear market. Therefore a small proportion of gold in a portfolio is worth holding as part of a balanced, diversified approach.

Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News. 

As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.