How the Fed's interest rate hike affects gold investing
On May 3rd the Federal Reserve again raised interest rates, this time to a range between 5% and 5.25%. It marked the tenth time the Fed bumped rates since March 2022. The news is not positive for prospective homebuyers or current homeowners looking to refinance, as rates will likely now move upward. It is, however, beneficial for those with high-yield savings accounts and CDs as account holders will likely enjoy higher interest rates on their money.
But what about those who have invested in gold or are considering doing so soon? What does the Fed's interest rate hike mean for gold investing? While it may be too soon to know definitively how the latest bump will affect gold, there are some historical trends to understand that can prove to be a predictor for gold investors.
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How the Fed's interest rate hike affects gold investing
While not guaranteed, the price of gold will usually decrease when interest rates rise and increase when interest rates go down. In other words: Gold often has an inverse relationship with interest rates. As mentioned above, when rates jump investors are typically more attracted to stocks, bonds and some more traditional deposit vehicles. Gold is typically not on the list, resulting in a drop in appeal and subsequent price.
That said, this isn't a hard rule. The price of gold was actually higher on Thursday ($2,044.70 an ounce) than it was on Tuesday before the Fed issued its announcement ($1,995.40 an ounce). That's just a few dollars shy of April's high of $2,048.45 an ounce - which was, in itself, the highest gold had been since 2020.
"From an investor perspective, we didn't see the peak yet, and the peak may be much higher than $2,000 - $2,500 in the long term," Baruch Silvermann, investor and CEO of The Smart Investor, recently told CBS News.
Yes, gold prices are influenced by supply and demand but they're also influenced by economic factors like the Fed raising rates and concerns about inflation. Even recent concerns about the banking sector caused a spike in gold investing interest. So those investing in gold can expect the price to be somewhat fluid. That said, the historic trend of a decrease in price measured against a spike in interest rates didn't immediately materialize after this week's news.
Not sure about gold investing? Learn how it could be a smart investment for you here.
Gold investing benefits to know
If you're looking for a way to protect your money in today's rate environment, gold can help. Here are three benefits prospective gold investors should know:
It can protect against inflation. If the purchasing power of the dollar is poor, as it usually is during times of high inflation, then gold is likely to do well. "Over time, the value of gold tends to rise as the purchasing power of fiat currencies falls," Harry Turner, the founder of The Sovereign Investor, an investment education website, previously told CBS News.
"This is because, unlike paper money or other types of investments, gold is a physical asset that can be stored and traded. As long as people continue to see it as a valuable commodity, the price of gold is likely to remain a good hedge against inflation."
It can diversify your portfolio. Trillions of dollars in retirement savings were wiped out last year due to poor stock market performance. While gold couldn't have stopped that, some of that money may have at least been preserved if it was diversified between stocks, bonds and gold. Gold, when put into your portfolio in the right amount, can help diversify your savings and protect you against larger economic headwinds.
It's easy to sell. It can be tricky selling stocks, particularly when trying to get the timing right. But because there's always been a demand for gold it's relatively simple to sell. Whether it be in coins, bars (bullion), or some other form, there's likely to be a gold buyer somewhere close by. The interest and purchasing power will typically remain consistent.
The bottom line
The Fed's latest interest rate hike may ultimately lead to a drop in the price of gold although early indications are hard to decipher. Either way, gold is a worthy investment for multiple reasons. It can help protect investors against the worst of inflation and it can be a good way to diversify your portfolio (although it should be limited to 5% to 10% total). Finally, it's generally easy to sell so if you want to move your money into something else in the future, gold won't be much of a block to your investment plans.
