Gold trades near $4,300 per ounce after the Fed raised interest rates last week for the first time in multiple years. Political uncertainty and high stock valuations could still pull investors toward the metal, even though the last rate-hiking cycle sent gold lower.
Gold sits well below the more than $5,000 an ounce it touched earlier this year, but the metal has been climbing in recent months. The Fed's rate increase last week, its first in multiple years, has reopened the question of where gold heads next.
The last hiking cycle sent gold lower
In early 2022, the Fed hiked rates aggressively to fight inflation, and gold fell before finishing that year flat. That was still a stronger result than the broader market, since the S&P 500 declined 19% over the same stretch.
This cycle differs, however. Inflation isn't at the decades-high levels it hit back then. Instead, the war in Iran is weighing on oil prices, which is rippling through the broader economy.
Political uncertainty could drive safe-haven demand
Midterm elections in November add another layer of uncertainty, and a fresh rate hike could reignite tension between the Fed chair and a president who has pushed for lower rates. That backdrop, combined with elevated stock valuations, may push investors toward safe-haven assets such as gold.
The SPDR Gold Shares fund (GLD), which tracks the spot price, trades at $398.38, down 0.69% on the day. The fund holds $148 billion in assets and carries a 0.40% expense ratio.
Gold may not reclaim its highs soon
Political and geopolitical uncertainty, layered on top of high stock valuations, could leave the broader market vulnerable to a correction, which may send gold higher in the process. Rising interest rates alone might not lift gold prices, but they could still contribute to a move upward.
A crash may not happen this year, and gold likely won't return to its highs anytime soon. Even so, an allocation to GLD can help investors reduce their overall portfolio risk.
Source: The Motley Fool
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