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Tags: gold | interest rates | federal reserve | retirement savings | long-term investing

Trevor Gerszt: If the Fed Is Hiking Rates, Why Isn't Gold Climbing?

Trevor Gerszt: If the Fed Is Hiking Rates, Why Isn't Gold Climbing?
(lenor / 123RF Stock Photo)

Trevor Gerszt By Friday, 24 February 2023 10:51 AM EST Current | Bio | Archive

Investing in gold isn’t a get-rich-quick scheme. It’s normally part of a long-term strategy of asset protection and portfolio diversification. In fact, for many investors, investing of any sort isn’t a get-rich-quick scheme, either.

While we may often think of stock market investing as gambling, that’s only because day traders, option traders, or high-frequency traders tend to attract a lot of media attention. There are still a lot of investors out there who treat stock markets the same way many of us treat gold, as part of a long-term process of building wealth.

But despite the knowledge that investing should be for the long term, many of us get wrapped up in looking at short-term, day-to-day, or even intraday prices of financial assets and commodities. We look at stock market indices, bond yields, gold and silver prices, or the price of oil. We obsess over why XYZ isn’t doing as well as we thought it would, and when its price might recover. And all too often we or those we know make decisions based on short-term price movements, rather than assessing our investments through a long-term lens.

That’s true of many gold owners today, who are wondering why gold hasn’t been climbing in price. After all, stock markets have been hammered in recent days by the prospect of more Federal Reserve rate hikes. And since gold and stocks are “supposed to” be inversely related, gold should be going up while stocks are going down, right?

Well, it isn’t quite so simple. So here are a few reasons why gold isn’t shooting through the roof right now, although that doesn’t necessarily mean that it couldn’t in the future.

Rate Hikes and Gold

The conventional wisdom states that rate hikes are bad for gold. This could be for a number of reasons. Among them are the fact that rising interest rates push bond yields higher and make bonds more attractive investments. But if you actually look at the statistics, it doesn’t bear out the conventional wisdom.

Let’s look at the last two cycles of rate hikes, from 2004 to 2006, and 2015 to 2018. From January 2004 to July 2006, the Fed hiked its target federal funds rate from 1% to 5.25%. In that same timeframe, gold went from around $400 to over $600 an ounce.

From November 2015 to December 2018, the Fed hiked the federal funds rate from 0.00-0.25% to 2.25-2.5%. And during that timeframe, gold went from around $1,140 an ounce to around $1,300 an ounce. So clearly, rate hikes don’t necessarily have a negative impact on gold.

Gold & Stocks

Conventional wisdom also says that gold and stocks are inversely correlated, so that when one is going up the other is going down, and vice versa. Certainly there are times when that is borne out, such as the U.S. bear market from October 2007 to March 2009, when stock markets lost over 50% of their value while gold gained more than 25%.

But what about those periods of rate hikes above? Rate hikes are also supposed to be bad for stock markets, yet from January 2004 to July 2006 the Dow Jones Industrial Average rose from about 10,400 points to about 11,200 points, while the S&P 500 rose from about 1,110 points to about 1,280 points. And from November 2015 to December 2018, the Dow rose from around 17,800 points to around 23,000 points and the S&P 500 rose from about 2,100 points to 2,490 points.

That just goes to show that you can’t always trust the conventional wisdom, and you often have to take it with a grain of salt. Even over the long term, there isn’t really any correlation between gold and stocks, either positive or negative. Since 1971, when President Nixon closed the gold window, gold’s annualized growth rate has been 7.56%, versus 7.27% for the Dow and 7.44% for the S&P 500. And since 2001, gold’s annualized growth rate has been 9.05%, versus 5.25% for the Dow and 5.07% for the S&P 500.

Gold, Inflation & Recession

Gold also has a reputation for being an inflation hedge and gaining value in the face of high inflation. During the 1970s, for instance, gold’s annualized rate of growth was 30% per year over the course of the decade. That’s phenomenal growth, but will gold repeat that the next time inflation becomes entrenched?

So far, we haven’t seen any indication that gold will grow like that in the current inflationary environment, although inflation hasn’t lasted nearly as long today as it did during the 1970s. So in that sense, the jury is still out. But gold is supposed to do well in inflationary environments, and thus far, its performance has been decidedly mixed. What gives?

Getting back to the part about gold being a long-term investment and not a get-rich-quick scheme, it’s still too early to write the history about gold’s performance during this period. Five to 10 years from now, we may end up with $3,000 an ounce gold and wonder how so few people had the foresight to see it happening. But hindsight is always 20/20 and foresight is, at best, 50-50. You’ll either make the right decision or the wrong one, and you won’t know until possibly much later.

If you think that inflation will continue to be a problem, or if you think that a severe recession is on the way, then you may decide that buying gold is a good choice for you. You’ll just have to trust that your prognostications about the future are correct, and live with the consequences of your actions.

No one can know the future for certain, which is part of what can make investing so frustrating. But given gold’s history of making gains during times of high inflation or recession, it’s no surprise that so many Americans today are looking to protect themselves and their financial well-being with gold. They’re willing to shrug off the short-term price weakness and use that as an opportunity to load up on gold while it’s still cheap, while trusting that gold will continue to gain in value over the long term, just as it has over the past 50-plus years.

If you want to learn more about how you can benefit from owning gold, call the precious metals experts at Goldco today. With thousands of satisfied customers and over $1 billion in precious metals placements, Goldco’s representatives can answer any questions you may have about buying gold.
Trevor Gerszt is the founder and CEO of Goldco, a precious metals dealer in Los Angeles. For more than 20 years, Trevor has sought out ways to help people build long-term wealth through the security and stability of precious metals and other alternative assets. Goldco is A+ Rated by the Better Business Bureau, a 5-Time INC 500 Winner and has countless 5-Star Reviews for its quality customer service, dependability and strong reputation.

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Investing in gold isn't a get-rich-quick scheme. It's normally part of a long-term strategy of asset protection and portfolio diversification. In fact, for many investors, investing of any sort isn't a get-rich-quick scheme, either.
gold, interest rates, federal reserve, retirement savings, long-term investing
Friday, 24 February 2023 10:51 AM
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