Gold Investors will come out Winners
Are you ready for higher interest rates?
This week, when Federal Reserve Chief Jerome Powell sits down with other members of the Federal Open Market Committee (FOMC), it is a near-certainty that they will pull the trigger on another interest rate hike on June 13.
For those with a betting nature, the odds favor a rate hike hands down. The CME FedWatch Tool currently rates the odds as 94% in favor of a quarter-point rate increase next week.
Just like a coin, there are two sides to a rising interest rate environment:
Savers win. Borrowers lose.
Look for the prime rate to climb to 5.25% by year-end and 6% in 2019 versus today’s 4.25% level. That has spillover impact in many areas of the economy.
1. Savers Win
Savers may see a marginal increase in CD and other interest rates on savings accounts at banks. However, banks have been stingy in recent months, and returns remain abysmally low. There are slightly better returns at online banks—but, that’s at the margin.
Banks are typical winners in a rising interest rate environment. Their profit margins widen out because they can lend at a higher rate but still pay depositors fairly measly amounts.
2. Borrowers Lose
Anyone who planned to buy a house this summer or take out a loan to purchase a new car will see higher interest rates when they borrow money. Credit card rates, which are notoriously high (sometimes 16% and higher), will rise along with the Fed’s move. That means anyone carrying a balance will get socked with even higher interest piling on each month.
Rates on home equity lines and adjustable-rate mortgages will also climb.
3. The Stock Market Doesn’t Like Rising Rates
Throughout history, rising rate environments have been a major factor that kills bull markets in stocks.
Fed weeks in particular have pressured stock prices lower, according to Schaeffer’s Investment Research.
On Thursdays—the day after Fed meetings—the SP 500 has shown an average loss of 0.74% when the Fed has raised rates. On Fridays, the average return is 0.54%.
4. Rising Rates Impact the Economy
Over time, the spillover impact of rising interest rates on the economy slows economic growth. Rising rates means that it is more expensive for businesses to borrow money to invest in new infrastructure or other investments.
Rising rates hurts the economy through their impact on household finances. Consumers drive nearly two-thirds of total gross domestic spending. If consumers are spending less due to rising interest rates, that slows the entire economy.
Tipping Point for Gold Is Near
The Fed’s interest rate hike this week may or may not directly impact your pocketbook (it depends on whether you are a borrower or a saver). But, the insidious impact of rising rates on the stock market and the economy stack up with each additional rate hike.
The Federal Reserve is way behind the curve on rate normalization after the 2008 Global Financial Crisis. Official fed fund interest rates aren’t anywhere near the normal 3.5%–4.0% level.
Yet, we are closer to recession than the start of an expansion phase.
Gold and the 179% Post-Crisis Gain
Gold is an insurance policy for when stocks crumble, the economy falls into recession, and the Federal Reserve runs out of options to ignite economic growth. As we enter our ninth year of economic expansion, we are closer than ever to that scenario—and the stock cycle is long in the tooth.
Don’t get lulled into complacency. Now is the time to act and fully diversify and hedge your portfolio with gold. That paid off for gold investors during the 2008 financial crisis, when gold prices climbed 179%: from a low around $680 an ounce in 2008 to above $1,900 an ounce in 2011.
Could it happen again? Market cycles repeat. No matter how smart the MBAs on Wall Street think they are, time and time again, market cycles repeat. Boom and bust.
Investors in gold have come out winners.
Don’t miss out. The cracks in the bullish economic cycle are already showing. Act now to fully protect your portfolio with physical gold before it’s too late. – David Beahm
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