The debt crisis is looming. Here's how gold can help investors.
The United States could soon face an unprecedented financial crisis unless lawmakers raise the debt limit to avoid a default. The U.S. surpassed its debt limit earlier this year, and Treasury Secretary Janet Yellen said this month the country could reach a default — meaning the government is unable to pay its bills — as early as June 1 without action to raise the debt limit.
While the U.S. has never before been in default on its debt, experts anticipate that doing so could result in a crisis. "In my assessment — and that of economists across the board — a default on U.S. obligations would produce an economic and financial catastrophe," Yellen has said.
For investors, the crisis could only exacerbate current market uncertainty. Already, more Americans are turning to gold as a way to diversify ahead of an expected recession — and to take advantage of its growing price value. If you're looking for a way to protect your investments against the potential fallout of a debt crisis, you may want to consider allocating a portion of your portfolio to a stable asset like gold, too. Below, we'll cover some of the reasons why.
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How gold can help investors amid the debt crisis
Here are two ways gold can help add stability to your portfolio in the face of a debt crisis.
Diversify against market changes
One consequence of a debt default, experts agree, is increased market volatility.
Writing for Bloomberg in early May, former Federal Reserve Bank of New York president William Dudley said markets would be shocked by a default. "Stocks and bond prices would decline violently," Dudley wrote.
Investors could benefit from gold in this instance since gold historically generally moves independently of the stock market. When other market values are down, gold tends to remain stable or sometimes even increases in value.
Long-term, diversifying your portfolio with gold can help you withstand cycles of volatility over time. However, there is plenty of benefits for long-term investors to keep money in growth-focused stock and bond markets. For a balance of growth and stability over time, experts generally recommend keeping an allocation of around 5% to assets like gold.
Get more information on investing in gold today with a free investment guide.
Lasting recession risks
A recent analysis by the U.S. Treasury Department and the Congressional Budget Office revealed that going into default could "cause severe damage to the U.S. economy." Between an elevated unemployment rate, high interest rates and volatility for stocks and bonds, the analysis shows that "default leads to deep, immediate recessionary conditions."
These conditions, in turn, would also likely lead to a decline in the value of the U.S. dollar throughout the global economy.
Historically, gold has been a solid hedge against the dollar during periods of recession and inflation. Its price tends to move at an inverse of the value of the dollar — which is part of the reason why the value of gold has grown throughout the past year as inflation remained high. If you're looking for a way to preserve purchasing power and value throughout a coming recession, gold could be a good option.
The bottom line
There's still time to avoid the debt crisis that could result from the U.S. defaulting on its debt in the near future, as talks between leaders in Washington are still ongoing.
If you're concerned about the consequences a default could bring to financial markets and the economy, allocating some of your investments to a safe haven like gold could benefit you today. Not only is it a historic hedge against losses in the stock market and the value of the U.S. dollar, but it can help you weather uncertainty over the long run — even once today's conditions become more stable.
If you're interested in gold investing, learn more with a free investors kit today.
