While gold has long been considered a safe haven in times of market volatility, investors are actually pulling out of the metal of Midas at this moment for a somewhat different choice — cold, hard cash. Gold prices dropped 2.2% on Wednesday following a reports that the Federal Reserve might once again raise interest rates, this time by 100 basis points.
Part of the reason for gold’s drop is that investors are reacting to the news of this potential interest rate hike, which could cause the economy to enter a full-on recession, by abandoning gold in favor of cash.
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Gold Investing Basics
Putting your wealth into gold might be the oldest investment in the world, and it is still an option many people employ. It’s generally used as a hedge against inflation, as its value is generally independent of other assets like stocks and bonds.
There are many ways to invest in gold, including buying actual gold bars, buying high quality gold jewelry, investing in future or using a gold mutual fund. A financial advisor can help you figure out the best way for you to invest in gold, if that is an option that interests you.
Why Investors Are Favoring Cash Over Gold
As noted above, inflation is very high in the U.S. right now — higher than it has been in decades in fact. As part of a plan to fight this inflation, the Federal Reserve has been raising interest rates throughout the year, with plans to do so again.
In effect, this makes it more difficult for Americans to get loans, meaning there is less money circulating and inflation is brought down. One of the consequences of this may be a recession, but policy wonks have decided fighting inflation is more important.
Another impact of the higher interest rates has been a jump in value for the dollar. It is trading higher against the British pound and the euro than it has in a long time. While this does mean that your trip to London might hurt your pocketbook a bit less, an even bigger impact is that investors see putting their money in cash as a strong hedge against the possibility of a recession.
Even fund managers are seeing actively-managed mutual funds have their best year since 2009 by allocating more of their assets to cash. Amid a strong dollar and high interest rates, cash isn’t trash and can even yield robust returns through the likes of CD laddering.
The Bottom Line
Gold prices are down as more investors are abandoning the precious metal in favor of cash. This is partly driven by rising interest rates creating a stronger dollar that is being used as a haven in the face of a possible coming recession.
- If you want help preparing for a potentially difficult economic period, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A recession doesn’t mean you should completely get out of the market, as it won’t last forever. Keep contributing to your 401(k) if you have one, and whatever you do, don’t panic.
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