Why You May Want to Consider Gold Before the Next Fed Decision
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The Federal Reserve left interest rates unchanged in March, but another decision from the central bank will come at the end of April.
Experts expect at least one more rate cut by the end of the year, and some investors may be considering buying gold before then. Here’s what the rising demand for gold means for you as the Fed assesses whether rate cuts make sense later in the year.
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How the Fed’s decisions impact gold
Interest rate cuts tend to be favorable for gold, since they increase the money supply, which can cause currencies like the U.S. dollar to lose value. Gold, on the other hand, can maintain its intrinsic value which means investors have to hand over more dollars to buy it, and the price can increase.
“Economic and geopolitical uncertainty also tend to be positive drivers for gold, due to its safe-haven status and ability to remain a reliable store of value,” experts at J.P. Morgan wrote in December. “It has low correlation with other asset classes, so can act as insurance during falling markets and times of geopolitical stress.
More investors pay attention to gold during economic cycles that feature considerable inflation and uncertainty. While you shouldn’t go all-in with gold, investors often see it as a way to diversify beyond stocks and bonds.
How much gold advisors typically recommend
Whether you should invest in gold — and how much — will depend on your goals, risk tolerance and time horizon. But many experts recommend an allocation of 5% to 10% of your portfolio to gold. That makes gold a part of a diversified portfolio instead of a core holding. This small portion is based on the fact that gold does not generate income, making it a complement to bonds and dividend stocks instead of a replacement.
If you aren’t sure how much to allocate to gold and how it aligns with long-term financial goals, it may make sense to speak with a financial planner. This planner can assess your age, risk tolerance, and income needs when suggesting the proper amount to invest in gold.
Where People Are Buying Gold Right Now
How to buy gold
You can own physical bullion and coins, but then you will have to consider storage and insurance. Physical precious metals also tend to come with higher transaction costs. Gold exchange-traded funds (ETFs) can be a simple starting point for investors who want exposure to gold.
Mining stocks are another good option for gold exposure. These stocks won’t necessarily perform directly in line with gold’s price movements, but these miners can outperform gold during gold rallies.
You can buy gold in a gold individual retirement account (IRA) but if you go that route, it is important to consider the tax impact of required minimum distributions (RMDs) and withdrawals. The money you take out of a traditional gold IRA is taxed as ordinary income, and RMDs will eventually force you to make annual withdrawals, which can result in a higher tax bill.
Risks and trade‑offs older investors should understand
Although gold can rally due to catalysts that would drag down equities, it still has some risks. Gold is volatile in the short run and can underperform when inflation is tame and stocks are rising.
Precious metals also do not provide any interest or dividends, which become more important for retirees who want to live off their cash flow.