The Federal Reserve left interest rates unchanged in March, but another decision from the central bank is due at the end of April.
Experts expect at least one more rate cut by the end of the year, and some investors may consider buying gold before then. Here’s what rising gold demand means for you as the Fed assesses whether rate cuts make sense later in the year.
How Fed decisions affect gold
Lower interest rates tend to favor gold, as it increases the money supply, which can cause currencies like the US dollar to lose value. Gold, on the other hand, can retain its intrinsic value meaning that investors have to give more dollars to buy it, and the price can go up.
“Economic and geopolitical uncertainty also tend to encourage gold, given its safe-haven status and ability to remain a reliable store of value,” analysts at JP Morgan wrote in December. “It has low correlation with other asset classes, so it can act as insurance during falling markets and periods of global stress.
More investors pay attention to gold during economic cycles that include high inflation and uncertainty. Although you shouldn’t invest in gold, investors often see it as a way to diversify beyond stocks and bonds.
How much gold advisors usually recommend
Whether you should invest in gold – and how much – will depend on your goals, risk tolerance and time horizon. But most experts recommend an allocation of 5% to 10% of your portfolio to gold. That makes gold part of a diversified portfolio rather than a primary holding. This small portion is based on the fact that gold does not generate income, making it a complement to bonds and equities rather than a replacement.
If you’re not sure how much money to allocate to gold and how it fits into your long-term financial goals, it might make sense to talk to a financial planner. This planner can assess your age, risk tolerance, and income requirements when suggesting the right amount to invest in gold.
How to buy gold
You can own bullion and coins, but then you will have to consider storage and insurance. Virtual precious metals also often come with high transaction costs. Gold exchange-traded funds (ETFs) can be an easy starting point for investors looking to gain exposure to gold.
Mining stocks are another good option for gold exposure. These stocks will not perform directly in line with gold price movements, but these miners can outperform gold during gold rallies.
You can buy gold through an individual retirement account (IRA) but if you go that route, it’s important to consider the tax implications of required minimum distributions (RMDs) and withdrawals. Withdrawals from a traditional gold IRA are taxed as ordinary income, and RMDs will eventually force you to make withdrawals every year, which could result in a higher tax bill.
Risks and trade-offs that older investors should understand
Although gold can rally because of catalysts that can drag down shares, it still has other risks. Gold is volatile in the short term and may not perform well when inflation is low and stocks are rising.
Precious metals also do not provide any interest or dividends, which is very important for retirees who want to live on their money.
