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Why you should invest in gold even as inflation cools

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There are a few compelling reasons why it makes sense to invest in gold even if inflation is cooling. Getty Images

It's no secret that inflation issues have had a big impact on the economy over the last couple of years. Not only have the prices of consumer goods been higher than normal, but the Federal Reserve has also hiked its benchmark rate 11 times over the past two years to try and get inflation under control. Those hikes have, in turn, caused interest rates on credit cards, loans and other banking products to climb, putting further strain on many Americans' wallets.

But while the Fed's moves to temper inflation have had a big impact on the economy, it appears the rate hikes may be working. The most recent report from the Labor Department suggests a slowing pace of inflation, with the Consumer Price Index (CPI) inching up by a modest 0.1% in November, which aligns closely with the expectations set by economists. And, the year-over-year increase stands at 3.1%, further reflecting the cooling inflation trend. 

While slowing inflation is a good thing for the economy, it can also have an impact on investors' strategies. For example, during periods of high inflation, many investors turn to gold to gain its unique benefits. But with inflation easing, does it still make sense to consider investing in gold? The short answer is yes, gold can still be a compelling investment, even when inflation appears to be on the decline. Below, we'll break down why.

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Why you should invest in gold even as inflation cools

There are a few reasons why it makes sense to invest in gold despite inflation cooling, including:

Gold is still a historical hedge against inflation

Gold has long been regarded as a hedge against inflation. And, while the recent CPI data indicates a moderation in inflation rates, the historical context of gold as a store of value remains relevant. 

That's because, throughout economic cycles, gold has proven its ability to preserve wealth when the value of regular currencies erodes due to rising prices. So, whether or not inflation is high currently, investing in gold can act as a safeguard against potential future inflationary pressures, providing a time-tested buffer for investors.

Find out more about how gold investing could benefit your portfolio.

It can help create a balanced portfolio

While inflation may be cooling at present, the economic landscape is still inherently unpredictable, so it's important to try and mitigate risk while creating a diverse portfolio. And, gold can play a crucial role in achieving a well-balanced portfolio, so it's worth considering for nearly any type of investor. 

This precious metal's performance often exhibits low correlation with traditional assets such as stocks and bonds, making it an effective tool for spreading risk. Including gold in a diversified portfolio can also enhance overall resilience, especially in times of economic uncertainty.

Global economic uncertainties are still looming

In addition to domestic inflation rates, global economic uncertainties persist. Factors such as geopolitical tensions, currency fluctuations and unforeseen economic shocks can impact financial markets. 

And gold, being a universally recognized and valued asset, tends to perform well during times of geopolitical instability or economic turbulence. As an investor, considering gold as a strategic component of your portfolio can provide a layer of protection against external shocks that might not be fully captured by domestic inflation data.

Supply-demand dynamics add to the appeal

The supply-demand dynamics of gold contribute to its investment appeal. Gold is a finite resource, and its extraction is subject to geological and logistical challenges. This inherent scarcity can contribute to its value over time. As economic conditions evolve, the supply-demand balance for gold may tilt in favor of investors, potentially leading to increased valuations.

Is gold investing right for you?

Before delving into the world of gold investment, it's crucial to assess whether it aligns with your financial goals, risk tolerance and overall investment strategy. Here are key considerations to help you determine if gold investing is right for you:

  • Your risk appetite: Gold, like any investment, carries its own set of risks. While historically less volatile than stocks, its value can still fluctuate based on market conditions. Assess your risk tolerance and consider whether you're comfortable with potential price swings in your portfolio.
  • Your investment horizon: The effectiveness of gold as a hedge against inflation and a portfolio diversifier often unfolds over the long term. If you have a short-term investment horizon or need liquidity in the near future, gold may not be the most suitable option.
  • Your portfolio diversification: Evaluate your existing investment portfolio. If it lacks diversification or you're heavily concentrated in traditional assets, introducing gold can enhance overall diversification and potentially reduce risk.
  • Your investing goal: Be clear about why you want to invest in gold. Whether it's to hedge against inflation, diversify your holdings or capitalize on potential price appreciation, understanding your objectives will help guide your investment decisions.
  • The current global economic outlook: Consider the broader economic environment. If you anticipate heightened global uncertainties, geopolitical tensions or currency fluctuations, the attributes of gold as a safe-haven asset may align with your outlook.
  • Your ability to monitor and adjust: Regularly monitor your investment portfolio and assess whether the inclusion of gold continues to align with your financial goals. Economic conditions evolve and periodic reassessment ensures your investment strategy remains relevant.

The bottom line

While the recent CPI data signals a moderation in inflation, the investment case for gold remains strong. Its historical role as a hedge against inflation, its ability to diversify portfolios, its resilience in the face of global uncertainties and the unique dynamics of its supply and demand make gold a compelling asset. And, an allocation to gold can provide a robust foundation for your investment strategy, offering stability and protection against a range of economic scenarios, making it worth consideration for most investors.

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