In the face of persistent inflation, interest rate increases, and a string of bank failures, gold has emerged as a beacon of resilience. Its price has surged to over $2,000 per ounce, nearing the record high set in 2020. This surge is not only due to the strong demand for the precious metal but also a host of other factors that are making gold an attractive investment option.
The United States Gross Domestic Product (GDP) has shown more resilience in the second quarter than expected, which has led to a swift fall in the price of gold. However, the precious metal remains on the buying list as the Federal Reserve raised interest rates by 25 basis points to 5.25%-5.50%, as expected by market participants. The Fed's less-hawkish guidance for the September meeting has also contributed to the attractiveness of gold.
The US Dollar Index (DXY) is going through tough times as investors hope that the United States central bank has put the last nail in the coffin. Markets see the interest-rate hike in July as the last one in the current aggressive policy tightening spell, and expect that the Fed will keep rates steady ahead. This has led to a significant reduction in fears of a recession in the United States, which acts as the cherry on the cake for US Dollar bears.
Frank Trotter, president at Battle Bank, has noticed two common themes when speaking with potential customers about the attractiveness of gold. "First is the view that there has been no meaningful action by either political party to begin to slow down deficit spending, and the resulting accumulation of debt," says Battle. Continued spending could lead to more inflation - and more investors turning to gold to diversify their portfolios.
"Second, many people we speak with also believe that the current inflation numbers are either bad estimates or that they will begin to edge upwards again after the summer," says Battle. This sentiment is echoed by Peter C. Earle, an economist at the American Institute for Economic Research, who cites several additional contributors to rising gold prices, including the Federal Reserve's interest rate hikes and the potential for a recession - which typically favors hard assets like gold - along with increased gold purchasing by central banks.
Global instability is another contributor driving up gold prices. "With the Russia-Ukraine War dragging toward a second year, the U.S. and China trading barbs over Taiwan and rumblings about de-dollarization, gold is reprising its ageless role as a hedge against geopolitical uncertainty," says Earle.
While it's nearly impossible to time the market with any asset class, investors can look to past trends for indicators of the best time to invest in gold. Inflation is one indicator, and the precious metal has performed well when interest rates are also high. For example, rates soared in the high-inflation era of the 1970s, from 5.84% in 1970 to 13.58% in 1980. According to Nasdaq, gold prices spiked from $35 per ounce to $850 per ounce over the same span.
As with other investments, gold prices fluctuate. Sometimes this fluctuation is more pronounced in the short term. Perhaps that's why many experts advocate for taking a long-term view toward gold investing. Gold can be considered a good long-term investment as a value store that protects against market losses. As Earle notes, "Many individuals who own gold aren't looking for market-beating returns. Rather, they know that there is a high likelihood that the purchasing power of the money they've converted to gold is likely to be safe from ruinous economic policies."
While gold can provide steady returns, the precious metal generally doesn't grow at the same rate as the stock market. Gold's foremost benefit is its ability to diversify your portfolio and preserve its value during financial uncertainty. Financial advisors often recommend limiting your gold investments to a maximum of 10% of your portfolio.
It's impossible to know with certainty where gold prices will be in the next five years. Still, it's worthwhile to examine the possibilities, including where to expect prices to go. For example, forecasting service WalletInvestor anticipates prices rising to $2,165 by July 2028. Jeff Clark, senior analyst at GoldSilver has also published his price projections, which include a bullish price prediction between $3,000 and $10,000 in five years.
"I don't know if gold will rise over the next five years," says Earle. "I will say that if the way in which central banks have orchestrated monetary policy for decades continues, with a profound inflationary bias and generating systemic risk time and time again, gold has a very positive long-term future."
The bottom line is that gold's comeback this year has been largely driven by turbulent economic conditions like heavy deficit spending, inflation, and elevated interest rates. Diversifying your portfolio with gold may help protect your wealth against economic and global turmoil and market volatility. Before you invest, do your research and consult your accountant or financial advisor. If you decide to purchase gold, make sure to go through a reputable gold dealer.
