Last month, issues with higher rents and food prices caused the overall U.S. inflation rate, with the inflation rate increasing to 3.4%. That was a 0.3% jump from the , and well above the Federal Reserve’s target inflation rate of 2%. It’s also 0.2% more than economists expected to see in December.
That unexpected uptick signals that the path to lower inflation could be bumpy — and that economic uncertainties are still looming. And, when these types of economic issues surface, they can have a big impact on the stock market and the wider economy. This, in turn, leads many investors to be on the lookout for resilient assets that can protect their portfolios.
. This precious metal, with its historical reputation as , tends to gain renewed attention from investors during times of high inflation. But does the December inflation report mean you should ? Below, we’ll break down what you should know about gold investing now that inflation is climbing again.
Should I invest in gold now that inflation is climbing?
While each investor has their own priorities — and therefore their own needs for their portfolios — gold can be a good addition in many cases. After all, gold’s storied historyduring economic uncertainties and inflationary pressures positions it as a compelling investment option. And, there are other reasons to invest in gold during periods of high inflation, too.
Why invest in gold during inflation?
Here are five good reasons to invest in gold during inflationary periods.
Inflation as a catalyst
Gold has long been regarded, so it can be a smart move to invest in the precious metal when inflation rates are high. That’s because, as the real value of regular currency diminishes, the demand for gold tends to increase, propelling its price upward. Investors see gold as a haven that can withstand the erosive effects of inflation, making it an attractive choice in times of economic uncertainty.
The importance ofcannot be overstated, especially when it comes to mitigating losses. And gold, with its historically low correlation to traditional assets like stocks and bonds, offers a unique diversification opportunity. Including gold in a well-balanced portfolio can enhance resilience and provide a buffer against the potential pitfalls of inflation.
Global economic turmoil
Gold’s luster shines brightest during periods of economic and geopolitical uncertainty, both of which we’re experiencing currently between the fluctuating inflation rate and global political issues. And, investors who are seeking stability and a secure store of value often turn to gold as a refuge. In times, gold often stands as a beacon of stability, making it a strategic choice for savvy investors.
Unlike many other assets, gold does not rely on income generation through dividends or interest payments. Instead,. This can be advantageous during inflationary periods, where the preservation of wealth often takes precedence over immediate income generation.
Central bank policies
Central banks play a pivotal role in shaping monetary policies. In times of rising inflation, central banks may adopt accommodative measures, such as low-interest rates, to stimulate economic growth. These policies can contribute to a conducive environment for gold prices to thrive, further solidifying its appeal for investors.
Drawbacks of investing in gold when inflation is rising
While gold can be a smart addition to most portfolios, it’s also important to consider the potential drawbacks of investing in it. These include:
Income generation limitations
While gold provides a store of value, it does not generate income like dividend-paying stocks or interest-bearing bonds, which can be a downside to some types of investors. As such, investors should carefully weigh the trade-off between potential capital appreciation and income generation based on their financial goals and risk tolerance.
Price volatility concerns
The historical volatilityis a factor that investors must acknowledge. Market sentiment, geopolitical events and changes in interest rates can lead to fluctuations in gold prices, presenting challenges for those seeking stable returns.
Limited industrial utility
While gold is used in certain industrial processes, its value is primarily driven by its role as a store of value and a safe-haven asset. This, in turn, may make gold more susceptible to changes in investor sentiment, so it’s important to weigh this factor.
The bottom line
In light of the current inflationary landscape, investing in gold could be a prudent strategy for investors seeking to safeguard their wealth and navigate economic uncertainties. Gold’s historical performance as an inflation hedge, coupled with its role in diversifying portfolios and providing stability during market turbulence, positions it as a compelling asset class.
That said, no investment is without its considerations, and carefully assessing your financial objectives, risk tolerance and the broader economic context is essential. Allocating a portion of your portfolio to gold can offer a strategic hedge against inflation, but it’s still important to strike a balance that aligns with your unique circumstances.