Gold has historically performed well during stagflation, a period of high inflation and high unemployment. In the 1970s, as the US experienced stagflation, the price of gold surged from $100 per ounce in 1976 to around $650 per ounce in 1980, as inflation reached 14%. It is believed that during stagflation, investors tend to turn to gold as a safe haven asset as the economic and financial conditions are uncertain. Additionally, gold is seen as a hedge against inflation, as its value is not tied to any currency or government.
In fact, gold outperforms other asset classes during times of economic stagnation and higher prices. The chart below shows that, of the four business cycle phases since 1973, stagflation is the most supportive of gold, and the worst for stocks, whose investors get squeezed by rising costs and falling revenues. Gold returned 32.2% during stagflation compared to 9.6% for US Treasury bonds and negative 11.6% return for equities.
According to the World Gold Council, a look at US economic history back to 1971 reveals that stagflation has been the most frequent scenario (occurring in 68 of the 201 quarters) as well as the most enduring, having twice lasted eight consecutive quarters.