The U.S. economy contracted 1.4 percent in the first quarter, leading some investors and analysts to raise the specter of the dreaded “R” word: recession. This, combined with historically high inflation and expectations that the Federal Reserve will raise rates faster than anticipated, could point to trouble ahead for a market already trying to grapple with war in Eastern Europe, ongoing COVID lockdowns, and more.

Investors, in fact, may be pricing in an economic downturn.

The chart on this page (in the print and ebook copies of this magazine) is the Wilshire 5000 Total Market Index divided by U.S. gross domestic product. Named for legendary investor Warren Buffett, who once called the ratio the best gauge of stock valuations, the “Buffett indicator” has also served as an interesting leading indicator. As you can see, valuations have historically peaked and then started to roll over between three and five quarters before a recession took place, the one exception being the pandemic-triggered recession in 2020. We’re currently seeing the indicator reverse course, but the difference this time is that stocks have never been so overvalued compared with the U.S. economy, making the risk even greater.

There are a number of things investors can do in advance of a possible recession, and that includes having exposure to physical gold as well as gold mining stocks. Both asset classes have historically helped investors offset potential market losses, and there’s good reason to believe they may do so again.

Going back 40 years, in every instance when the S&P 500 has fallen into a bear market — that is, when it fell more than 20 percent off its recent peak — physical gold and gold mining stocks have outperformed, by as much as 41 basis points in the case of gold stocks during the dotcom bubble in 2000. The price of the yellow metal, meanwhile, delivered positive returns on all but one occasion, and that’s when the whole world shut down in response to the onset of the COVID-19 pandemic.

Past performance is no guarantee of future results, of course, but I still like gold and gold stocks as a potential hedge against recessionary risk.

In more recent years, gold has had to compete with Bitcoin as a store of value. I also like Bitcoin, but unlike its digital cousin, gold has a centuries-long track record, and enjoys near-universal trust and acceptance. Gold also has lower volatility than Bitcoin, is held by dozens of central banks and remains one of the most liquid assets on earth. In 2021, the precious metal did more than $130 billion in trading volume every day on average. Only euros, pound sterlings, U.S. Treasuries and S&P 500 stocks traded more.

Frank Holmes is CEO and CIO of U.S. Global Investors. The original version of this story appeared on the U.S. Global Investors’ website. Read it here.