Should you buy gold before the next Fed rate hike?

Following a year-plus of regular rate hikes, the Federal Reserve paused rates in June and the latest inflation numbers show inflation is beginning to cool — all indications the economy might be on a path to improvement. But with signs pointing to another rate hike after the Fed's July 25-26 meeting, we clearly have a long way to go.

Throughout the economic turbulence of the past few years, gold has remained a popular asset for investors seeking stability and protection from market conditions. But is it still worth buying with an impending rate hike on the horizon?

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Should you buy gold before the next federal rate hike?

To answer this question, it's important to understand the factors that impact gold prices, as well as how important prices are to your investment decision.

How federal interest rates affect gold prices

When the Fed raises interest rates, savings interest rates also increase. That means it becomes more attractive for consumers to put their money into interest-earning deposit vehicles such as high-yield savings accounts and CDs. Gold isn't as popular an investment option, and as a result, its price typically goes down.

That said, this isn't a hard-and-fast rule. Over the course of 15 months of rate hikes, gold prices rose steadily, hitting a near-record high in April. They continue to hold around the $2,000 mark, and experts predict they may remain — if not go even higher — in the coming months.

That's because, while inflation plays a role in gold prices, so do several other factors. It's the interplay between these factors that ultimately determines the price of gold.

Other factors that affect gold prices

In addition to federal interest rates, gold's price is influenced by:

• Inflation: The Fed raises interest rates to fight inflation, so an upcoming hike is a sign inflation continues to be an issue. Gold has always been considered a hedge against inflation as its value has historically increased as the dollar's value decreases. When inflation is high, investors often flock to gold as a safe haven to preserve their wealth.
• Political uncertainties: Tensions between nations, trade wars and other geopolitical events can affect gold prices. Investors who fear the impact of these uncertainties on the stock market and other traditional investments turn to alternative assets like gold to protect their investment dollars, driving prices up.
• The state of the global economy: Gold's stability also makes it an attractive investment in times of global uncertainty. Central banks worldwide hold gold in their reserves to mitigate risk, and investors seek it out for the same reasons. For example, gold's all-time high price occurred in August 2020 as the global economy reeled from the effects of Covid.

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Why gold is a smart investment at any time

Gold prices and where they're heading are worth tracking, but they're not as important to your investing decision as you might think.

Gold is best viewed as a long-term investment that protects your portfolio from the risk of more-volatile assets, which can lose value precipitously in times of market turmoil. While gold provides reliable returns, it's not meant to grow your wealth the way assets like stocks and bonds do.

That's why experts recommend putting only 5% to 10% of your portfolio in gold. It's also why trying to time the market isn't the right approach when it comes to gold investing.

"Although gold can see a dramatic rise in price during times of volatility, I don't recommend trying to time those price movements," Alex Rezzo, CFP, founder of Andante Financial, recently told CBS News. "First, it's tough to time your entrance and exit to your gold position profitably, and even professional commodities traders suffer significant losses trying to do this."

The bottom line

Another rate hike could cause a drop in gold prices, but it's only one of many factors that impact them. Where prices head next depends on how these factors interact and how they affect overall investor confidence. Rather than attempting to predict the future, you're better off focusing on gold's long-term benefits when deciding whether to add it to your portfolio.

While there are no guarantees when it comes to investments, gold has proven to be a smart way to shore up your portfolio and help it weather market ups and downs over many years. That makes it a smart investment any time, rate hikes or no. Of course, as with any investment, it's important to weigh the pros and cons against your individual investing goals and speak with a financial advisor for guidance customized to your situation.