Gold is considered a good asset to hold in recessions, but oil stocks like Cenovus Energy (TSX:CVE)(NYSE:CVE) are doing better this year.

Many economists think that we’re about to enter a recession. Canada’s most recent GDP reading was pretty strong, but the U.S. recorded negative GDP growth earlier this year. If the U.S. records another quarter of negative GDP growth, then it will enter a technical recession.

Although a recession this year is not guaranteed, there are many experts who think we’ll enter one by the first half of 2023. So, it would be wise to prepare for one. Experts can get predictions wrong, but in general, it pays to listen to those who study a topic professionally.

This observation leads to one conclusion: you should build some recession protection into your portfolio. There are many assets out there that some people consider recession resistant, including utilities, discount retailers, and gold. Oil is usually not considered one of them, but oil stocks are proving to be the best-performing asset class this year. In this article, I will explore the question of whether you should favour oil stocks or gold as protection against a recession.

In theory, gold is a much better recession asset than oil is. People buy gold when times are tough because it is useful for bartering and because it has a +6,000-year history of use as money. Oil is a commodity that is used when there is demand for its productive uses. Theoretically, oil prices should go down in a recession, unless supply is constrained. This year, supply is, in fact, constrained, thanks to supply chain issues and the war in Ukraine. So, oil is defying its general tendency to go down in weak economic conditions.

Because of supply chain issues, oil prices are rising dramatically in 2022. At its highest point this year, oil was going for $123, its highest price in nearly a decade. Although the economy is slowing down, oil supply is being constrained enough that the price is rising anyway.

We can see proof of this by looking at Cenovus Energy’s (TSX:CVE)(NYSE:CVE) most recent earnings release. In the first quarter, Cenovus delivered the following:

Virtually every metric improved dramatically. Not only did all cash flow and earnings metrics improve, but debt was reduced, too! It was a solid showing from CVE, which tripled its dividend shortly after the results came out.

Having looked at the different use cases for oil and gold, we can now answer the question of which is the better recession play.

The answer is that it depends on the severity of the recession.

In a true “collapse” scenario, where institutions break down and electricity becomes unavailable, gold is more useful than oil, because you can barter with it. It can be thought of as a kind of disaster insurance. However, you’re more likely to get positive long-term returns with oil than with gold, because it has a more meaningful productive use case.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

While the entire tech sector is in a selloff, one Canadian tech stock has jumped 50% in two months. Is…

These TSX stocks have strong upside potential and could deliver multi-fold returns in the long term.

These top TSX dividend stocks look cheap to buy today for TFSA investors focused on passive income.

Are you an investor that isn’t scared of a little volatility? Here are three top picks!

While gold is considered a safe bet during the recession, there are plenty of businesses that might be considered equally…

Here are top dividend stocks at cheap prices for passive income and total returns.

Are you a new investor looking for stocks to add to your portfolio? Here are three top picks!

Buying stocks instead of holding cash is one way to protect your finances from the effect of rising inflation.

These 5 Stocks Under $50 Could Be Great For Building Wealth

In this FREE STOCK REPORT, Iain Butler, and his team at Motley Fool Canada’s Stock Advisor have released a special free report, detailing 5 stocks under $50 that they think are fantastic opportunities in today’s volatile market. Don’t look back five years from now, regretting that you failed to act.

We're helping the world invest better. See our Foolish investing philosophy.

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people around the world achieve their financial goals through our investing services and financial advice. Our goal is to help every Canadian achieve financial freedom and make all levels of investors smarter, happier, and richer.

From breaking news about what is happening in the stock market today, to retirement planning for tomorrow, we look forward to joining you on your journey to financial independence.

© 2022 The Motley Fool Canada, ULC. All rights reserved.