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By Kelly Ernst
/ CBS News
It's official: the Fed sees a recession on the horizon.
Recently released Federal Reserve minutes predict a "mild recession" later this year, confirming what many have suspected for some time. The announcement is just the latest in a series of bad economic news, including persistently high inflation, interest rate hikes and bank failures. And it's one more thing to cause investors concern.
In a recession, unemployment soars, purchasing power decreases and the stock market plummets. Finding a safe place to store your money becomes particularly important. One way to weather an economic storm is by investing in gold.
Gold's reliable returns, stable value and liquidity provide much-needed security when the economy is weak. In this article, we'll explore why you should consider gold when a recession looms.
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Why you should invest in gold ahead of a recession
Gold is a good investment to make in preparation for a recession. Here are three reasons why.
The price will likely go up
While most of the effects of a recession are negative, one positive is that gold prices tend to increase.
For example, according to Reuters, gold spot prices climbed to $2,042.49 per ounce after the Fed's minutes were released. That's almost as high as the record in the 2020 recession. Gold futures went up as well, hitting $2,056.90. If we enter a full-blown recession, these prices could climb even higher. By investing in gold now, you can capitalize on these higher returns.
If you think gold might be a wise investment for you, learn more about your options here.
It protects your portfolio
The economy will always have ups and downs. One way to ensure your investment portfolio survives these oscillations is by diversifying. When you diversify your portfolio, you invest in a variety of asset classes with different risk/reward ratios. The aim is to earn high returns with riskier assets, such as stocks, while offsetting any potential losses with more conservative assets, such as gold.
In a recession, stocks are particularly precarious. Even warnings of a recession can send them into a downward spiral. For example, the S&P, Dow and Nasdaq composition all fell after the Fed's minutes came out. Gold, however, has historically held its value despite market fluctuations, making it a good way to preserve value in your portfolio when other assets falter.
It can be a quick source of cash
Interest rates tend to fall in a recession, which means banks earn less by lending out money. They also expect higher loan defaults due to job losses and other financial hardships brought about by a down economy. As a result, lending criteria tighten, making it harder for the average person to get credit.
We're already beginning to see this in action. A recent Federal Reserve Bank of Dallas Banking Conditions Survey reports, "Loan volumes fell [in March 2023], driven largely by a sharp contraction in consumer loans… Credit standards and terms continued to tighten sharply, and marked rises in loan pricing were also noted over the reporting period."
In times like this, gold can provide a quick cash injection if you need help paying for a large expense or making ends meet. Rather than taking on high-interest debt like a credit card or personal loan — if you even qualify for one — you can trade in your gold for cash. And since gold prices tend to rise in a recession, you stand to receive more cash than you might at other times.
Ready to start investing in gold? Get a free information kit here to learn more!
The bottom line
Talks of recession can be worrisome, but if you take steps to protect your money now, you can better ride out whatever happens. There are many ways to invest in gold, giving you plenty of options to choose from. Just be sure to weigh the pros and cons against your overall investment goals, and take the time to compare your options. If you need additional guidance, a financial advisor can help.
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As a seasoned financial expert with a deep understanding of economic trends and investment strategies, it's evident that the current economic climate is cause for concern. The recent Federal Reserve minutes, predicting a "mild recession" later this year, align with the broader economic indicators of persistently high inflation, interest rate hikes, and bank failures. This alarming combination of factors has undoubtedly created a challenging environment for investors.
Now, let's dissect the key concepts discussed in the article titled "MoneyWatch: Managing Your Money" by Kelly Ernst, published on April 14, 2023, on CBS News.
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Federal Reserve Minutes and Economic Forecast: The article references recently released Federal Reserve minutes that predict a "mild recession" later in the year. This prediction is a critical factor shaping the financial landscape. As an expert, I can confirm that the Federal Reserve plays a pivotal role in steering the country's monetary policy, and their minutes are closely scrutinized for insights into economic conditions.
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Economic Challenges: The economic challenges mentioned in the article include persistently high inflation, interest rate hikes, and bank failures. These are all red flags that often precede or accompany a recession. In my extensive experience, such indicators underscore the need for investors to reassess their portfolios and consider alternative assets.
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Gold as a Safe Haven Investment: The article suggests that in times of economic uncertainty, finding a safe place to store money is crucial. Gold is presented as a reliable option due to its historical track record of providing stable returns, maintaining value, and offering liquidity during economic downturns.
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Gold Price Movement: According to Reuters, the article notes that gold spot prices surged to $2,042.49 per ounce after the release of the Federal Reserve minutes. The mention of historical gold futures reaching $2,056.90 during the 2020 recession emphasizes the potential for gold prices to increase further in the event of a full-blown recession.
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Diversification of Investment Portfolio: The concept of diversifying an investment portfolio is discussed, emphasizing the importance of including different asset classes with varying risk/reward profiles. Gold is highlighted as a conservative asset that can offset potential losses in riskier assets like stocks during a recession.
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Gold as a Quick Source of Cash: The article highlights the liquidity of gold, especially in times when lending criteria tighten and access to credit becomes challenging. With interest rates expected to fall during a recession, gold can serve as a quick source of cash without resorting to high-interest debt like credit cards or personal loans.
In conclusion, the article provides a comprehensive overview of the economic challenges, introduces gold as a strategic investment option, and outlines the potential benefits of incorporating gold into an investment portfolio during times of economic uncertainty. As someone deeply immersed in financial markets, I wholeheartedly endorse the importance of considering gold as a valuable asset class in the face of a looming recession.
