What the pause in rate hikes means for gold investing
For the second time this year, the Federal Reserve has paused interest rate hikes. This is a welcome relief for consumers and borrowers who have been paying increasingly more for everything from groceries to mortgages. But what does it mean for gold investors?
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What the pause in rate hikes means for gold investing
Gold investing is at an 11-year high after a year and a half of regular interest rate increases. Will the trend continue after the Fed's pause? We asked the experts.
"There is a case to be made that this would be bullish for gold prices," says Doug Carey, CFA and president and owner of WealthTrace. "Historically, there has been an inverse relationship between interest rates and the price of gold. When interest rates rise, the opportunity cost of holding non-interest-bearing assets like gold increases.
"This means that as interest rates go up, investors might be more inclined to invest in interest-bearing assets like bonds or savings accounts, which can provide a reasonable return on their investment. As a result, the demand for gold, which doesn't offer interest or dividends, tends to decrease, putting downward pressure on its price. On the flip side, a pause or decrease in rates can bode well for gold prices as more investors get out of bonds and cash and move into gold."
Other experts predict gold prices will remain largely unchanged.
"The Fed's likely pause in its interest rate hikes over the past 18 months has already been priced into the price of gold and will likely have little to no impact," says Dana Menard, CFP, founder and lead financial planner at Twin Cities Wealth Strategies. "There are many other factors that go into the price of gold other than just interest rates, such as supply and demand, geopolitical risks, etc., so I wouldn't tie the price of gold directly to the Fed's decision all that much as there are many other factors at play."
Why gold is a smart investment at any time
Whether gold prices hold steady or increase, there are other things to consider when deciding whether to invest in gold. There are many benefits that make gold a smart addition to your portfolio, no matter where current prices are. They include:
Stable value
Gold has been a store of value for centuries, and its price has been relatively stable over the long term. Unlike stocks or bonds, the value of gold doesn't depend on a particular economy, making it a safe haven in times of economic uncertainty.
Inflation hedge
As inflation increases, the purchasing power of paper currency declines, but this isn't the case with gold. Historically, gold prices tend to increase when inflation rises, as investors seek assets that hold their value. Investing in gold can help you maintain your portfolio's value when inflation is high.
Diversification tool
Diversification is critical to minimize investment risk and maximize returns. Gold is an excellent component of a diversified portfolio because it's negatively correlated with stocks and bonds. This means that when stocks and bonds go down, the value of gold goes up, and vice versa. As a result, gold can help protect your portfolio from losses caused by other assets.
Limited supply
Gold is a finite resource and, unlike fiat currency, it can't be printed at will. The limited supply of gold, plus its use in everything from jewelry to electronics, means that it's always in demand. This makes it easy to sell for cash in a pinch. And when the economy is shaky, gold prices rise, as demand for its stability increases.
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The bottom line
The Fed's decision to pause interest rate hikes may have an impact on the gold market in the short term. However, ongoing market uncertainties and still-high inflation mean that gold investing remains a reliable strategy for portfolio protection in the long term.
As with any investment, though, you should carefully consider your risk tolerance and goals before making any decisions.
"Ultimately, it's important to make sure investing in gold makes sense for your individual financial situation to begin with," says Scott Sturgeon, CFP, founder of Oread Wealth Partners. "It's not necessarily a great fit for everyone."
