The U.S. Federal Reserve elected to hold rates steady at its latest policy meeting on Wednesday. This move came as no surprise. The Fed also discussed how it sees the need for gradual hikes going forward, which is also not very newsworthy. Many investors, however, seem to misinterpret what higher rates really mean for the markets.
Gold is a common object of discussion when it comes to higher interest rates. The theory, among some investors and some financial “experts” goes something like this:
Higher rates are a negative for gold and other hard assets, because they increase the opportunity cost of holding such assets.
This is an extremely misleading statement, and now seems like a good time to set the record straight. Higher rates come with a hotter economy and rising inflation. Central banks use interest rates to control economic activity: Raising rates is like applying the brakes, and is done so to slow the economy down. This, in turn, may help keep inflationary pressures under control.
The key for gold investors, however, is that little part about rising inflation. Gold can be a very useful tool for hedging against rising inflation, as it may hold its value-or even increase sharply in value-in an inflationary environment. Gold may potentially partially offset, or even completely offset, a decline in purchasing power and net returns, as each dollar out there purchases less and less goods and services.
Although gold does not pay a dividend, as many financial “experts” will be happy to tell you, it does potentially offer numerous other benefits that may far exceed a paltry one, two or even three percent dividend yield.
If you have any doubts about how gold may perform as rates are climbing, simply look at a chart and see for yourself how gold has performed during previous tightening cycles. The yellow metal often sees strong gains despite higher rates, and with good reason. Higher rates mean inflation is already on the rise, and purchasing power is already on the decline. Not only that, but higher rates can potentially have a very bearish effect on stocks and risk assets.
This means that gold investors now have two solid reasons to buy gold even as rates go up: To fight inflation and a decline in purchasing power and to diversify away from stocks.
Inflation is certainly picking up, and the stock market could be on the last legs of a rally that has already lasted for a decade. Higher rates could, in fact, be the final straw for a stock market that is already arguably far-overvalued.
The bottom line is: Don’t let the notion of higher interest rates deter you from making a significant investment in gold or hard assets. On the contrary, right now may be the ideal time to build an allocation in gold as inflation rears its ugly head and as stocks near what could be a long-term top.
Adding this key asset class to your portfolio has never been easier, and can be done by simply picking up the phone.
Speak with an Advantage Gold account executive today about the potential benefits of gold ownership and how gold may potentially insulate your portfolio from rising inflation and a reversal or even collapse in stocks. Our account executives are here to answer any questions you may have, and can even show you how to incorporate gold right now using your IRA account.
Don’t wait for rising inflation to erode your purchasing power further, or for the next major stock market crash to wipe away a significant amount of investor wealth. Explore your options for gold ownership today. Call Advantage Gold at 1-800-341-8584 to get started now.Tags: advantage gold, Fed, gold, interest rates rises, opportunity cost, purchasing power, tightening cycle