Gold prices are down. Here's why you should still invest.
Following a strong upward trajectory over the past several weeks, gold prices this week dipped back down to where they were over two months ago.
There may be a few factors contributing to the drop. For one, gold prices rose as demand grew over the past few weeks amid concerns over the U.S. defaulting on its debt. While the debt ceiling still hasn't been raised, reports from negotiations from lawmakers in Washington have been positive, which could dampen some of the recent surges.
Another potential reason may be uncertainty about the Federal Reserve's next rate move. While the Fed could be ready to pause rates, new data from the U.S. Bureau of Economic Analysis shows that prices rose by 4.4% year-over-year in April — causing predictors like the CME Group's FedWatch Tool to increase the likelihood of another rate hike in June.
Despite these short-term factors, though, gold can still make a good investment choice for investors focused on the long run. In fact, these fluctuations are likely just a temporary decline over the broader rise gold may see for months to come.
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Why now is still a good time to invest in gold
Overall, gold is still up over 5% from this time last year. Despite today's slight move down, here are a few reasons why gold is still worth it.
It's a hedge against the U.S. dollar
Inflation may be starting to cool, but the value of the U.S. dollar is still much lower than recent highs last fall. Because it tends to move inversely to the dollar's price, gold could still be a good bet for maintaining the value of your money when the dollar is low.
"The U.S. dollar is expected to weaken over the coming years," says Shawn Ballinger, Columbus Street Financial Planning. JP Morgan Research analysts took a "neutral stance" on it earlier this year.
If that's true, buying into gold could help investors maintain value through a period of decline. "These factors, along with a technical price breakout, may portend well for gold like it did in 2002 through 2012," Ballinger says. During that period, the spot price of gold rose from around $300 to around $1,700 per ounce, according to data from the World Gold Council. "No two economic cycles are identical, but 2023 looks a lot like the 2001 to 2002 timeframe economically."
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It can help against a coming recession
Amid debt ceiling negotiations and changing opinions on coming interest rate hikes, concerns remain among experts and Americans about the potential for a recession.
In minutes released last week from the Fed's meeting earlier this month, Fed staff echoed their March prediction that a recession may be likely this year.
"The economic forecast prepared by the staff for the May FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery," the minutes read.
Diversifying your portfolio with a stable asset like gold can be a smart choice ahead of a recession when market conditions tend to look more vulnerable. Though there's no guarantee what a recession could mean for any market, allocating a small portion of your portfolio to gold, which often remains stable or may even increase when the stock market moves downward, could act as a safe haven.
The bottom line
Gold prices this week are experiencing a dip compared to recent highs. But that doesn't mean we're reaching the end of the current price run. A few different factors, including a potential decline in the value of the dollar and the still-looming possibility of a recession, could bode well for gold investors in the months to come.
What's more, gold can be a smart investment in any economy. Diversifying by adding an alternative asset like gold could be a good way to make sure you can weather volatility while still taking advantage of growth-focused markets in the long-term.
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