Precious metals such as gold have allowed individuals to preserve the value of their holdings during periods of economic upheaval for decades. Since gold does not depreciate in value, even when the economy falters and fiat currencies lose value, investing in the metal has been an ideal way to store and preserve the value of holdings through an economic downturn.
Global economic circumstances in recent years have caused the demand for gold as a store of value to increase amid inflation, fears of recession and weakening currencies. Gold saw its demand increase dramatically toward the end of 2022 when several central banks across the world started buying up more gold bullion. The gold rush among central banks came as countries became increasingly wary of an impending worldwide financial crisis, changes in the international monetary system and anxiety over the risk of the greenback’s domination on the global economic scale.
Current demand for gold is poised to rise even higher, thanks to a combination of market forces that have encouraged investors to pump more money into the gold market in recent months.
However, although worsening economic conditions in the past few years should have resulted in a commensurate increase in gold demand and prices, the precious metal’s prices have faltered due to rising interest rates. The U.S. Federal Reserve has raised benchmark interest rates for several consecutive months to help combat rising inflation levels across the country, with the recent 5% total increase being the highest interest rate hike since 2007. Offering higher interest rates to consumers would discourage borrowing and spending, ultimately slowing down economic activity in the country enough to keep inflation levels down.
These efforts have been somewhat effective, bringing down the year-on-year inflation rate from 9.1% in June 2022 to 5% in March 2023. The rate increases also raised the opportunity cost of holding gold bullion and encouraged investors to turn to other assets that earn interest.
However, with inflation going down from the highs of previous years, especially in 2022 when inflation levels in the United States reached a 40-year high, gold performance has steadied and improved as global factors trumped up demand for the precious metal.
Gold’s performance in recent years amid rising inflation and high-interest rates showed that it can buffer investors from inflation and interest rate risks to some degree.
Morningstar portfolio strategist Amy Arnott notes that while gold “may or may not” be a good hedge in the short-term, it can retain its value against inflation over the long-term. This may be the reason why gold extraction companies such as Freeport-McMoRan Inc. (NYSE: FCX) aren’t normally bothered by the market fluctuations of this commodity that happen from time to time.
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