Gold has long been a popular choice for investors seeking stability and diversification in their portfolios as the commodity has historically been used to hedge against economic uncertainty and geopolitical risks. In addition to being a long-time symbol of wealth, it is also widely used in various industrial applications, especially in electronics, healthcare, and aerospace. While gold has historically performed well in these situations, there are other factors that can influence the price of the precious metal, leading to questions about when is a good time to buy gold.
THE CASE FOR GOLD
Economic Uncertainty & Market Turbulence:
Gold tends to perform well during times of economic uncertainty and market turbulence. When traditional investments like stocks and bonds face volatility or depreciate, investors often turn to gold as a safe-haven asset. This is because it acts as a hedge against inflation and currency devaluation; both preserving wealth and providing a measure of stability in times of economic downturns.
Political instability, geopolitical tensions, and trade disputes can create uncertainties that impact global financial markets. In such scenarios, investors often turn to gold as a safe asset due to its universal acceptance and value across borders.
Monetary policy, such as interest rate decisions and quantitative easing measures, can influence gold prices. During periods of loose monetary policy or excessive money supply, gold is perceived as a hedge against potential inflationary pressures. This often attracts investors seeking to preserve purchasing power.
THE CASE AGAINST GOLD
Real Interest Rates:
Far and away the most important predictor of gold prices are real interest rates. Gold tends to perform well when real interest rates (adjusted for inflation) are negative or low. In such environments, the opportunity cost of holding gold (the forgone interest income) decreases, making gold comparatively more attractive to investors. With today’s higher interest rates and moderating inflation, gold is unlikely to emerge from the state of torpor it has found itself in over the past several years.
IN CONCLUSION – IS NOW A GOOD TIME TO BUY GOLD
When economic uncertainty looms, geopolitical risks heighten, or real interest rates begin to fall, gold can act as a safe-haven asset and a hedge against potential risks. However, gold does not produce income and exclusively relies on positive price movement for its returns. While the current economic environment ticks most of the positive circumstances listed above, the attractiveness of other safe, income-producing assets due to real interest rates keeps us from considering gold as a good choice today.
To determine whether or not gold is a good investment for your specific financial situation, we recommend reaching out to your wealth advisor.
Author: Michael Gibb | President & CEO
Written: July 30, 2023