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Some observers expect gold prices to rise in the coming months, despite the recession. As the first chart shows, normally gold prices tend to fall during U.S. recessions, as marked by the shaded areas. (The "monthly" average price for January 2009 is actually for January 7.) The tendency is far from uniform, however. In the back-to-back recessions of 1980 and 1982, the price first plunged, then rebounded just as sharply. In the recessions of the early 1990s and 9/11, gold prices hardly moved.
Gold prices can be expected to fall during recessions because gold plays a role as a hedge against inflation. When the general price level rises rapidly, a “flight from paper money” can push gold prices up. Since recessions tend to damp inflation, gold prices should come back down. But the ragged pattern in the first chart suggests that there is more to the story. For starters, in this as in earlier recessions, gold prices do not fall as far or fast as other commodity prices. A case in point in this recession is the plummeting of oil prices from $145 a barrel to around $40. The current price of gold, about $840 a troy ounce, is down only about 20 percent from its spike above $1,000 last March, when Bear Stearns collapsed. Why this disparity between gold and other commodity prices? And why the “double pump” in gold prices today and in the recessions of the early 1980s? When governments combat recessions (e.g., in Barack Obama’s new administration), budget deficits and easy money may ignite new inflationary fears. This in itself could restore the demand for gold. A related influence may play out in currency markets. Today as in the early 1980s, uncertainty about the role and value of the dollar may stimulate demand for gold, raising its price relative to other commodities. The chart below shows that the “real” price of gold today is about the same as it was 20 or 25 years ago. The chart compares indexes of gold prices and the general price level (the consumer price index). Beginning some 20 years ago, as inflation was brought under control, gold prices lagged far behind the increase in prices generally. 
Only in this decade, following the steady rise in gold’s price after 2000 (as spurred by the rise of gold-hungry India and China), has it caught up with the general price level. As markets adapt to the spiraling federal deficit and growing fear of a run against the dollar, gold prices may once again rise faster than the general price level. If so, there could be an upside to gold prices in the next year or so.
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