Gold Rises After Fed Rate Hike as Inflation Sizzles at 40-year High

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The Federal Reserve hiked interest rates by .75 basis points Wednesday afternoon, pushing the Fed fund rate to 2.25-2.50%. This marks the fourth-rate hike by the central bank this year. Yet, as CPI inflation ratcheted to another fresh 40-year high at 9.1% in June, it is evident that the Fed is losing its battle in the fight against inflation.

Spot gold climbed after the Fed announcement, recently changing hands at $1,737 per ounce. Gold has been gaining in recent days, climbing from a recent low of $1,693 on July 20. Long-term investors saw the retreat under $1,700 an ounce as an excellent buying opportunity, especially as the weakness in the U.S. dollar means you get more gold for your dollars right now.

In today’s post-meeting news conference, Federal Reserve Chairman Jerome Powell stated he doesn’t believe the U.S. economy is in recession. However, investors may be wise to take this analysis with a grain of salt, given the central bank’s insistence that 2021 inflation would be “transitory.”

Second quarter gross domestic product (GDP) data is due out on Thursday. A negative reading would fulfill the “rule of thumb” definition of a recession, which is: two consecutive quarters of negative GDP growth. In Q1, the U.S. economy shrank by 1.6% and the Atlanta Federal Reserve gauge has projected an economic decline of about the same amount for Q2.

In today’s economic environment – with the stock market firmly in a bear market and inflation at 40-year high – it reminds us that there are things we cannot control. However, investors should focus on what they can control, including portfolio allocations that protect and hedge your hard-earned wealth.

With the S&P 500 down 15% year-to-date, and the U.S. Government Fixed Income Index down 10% year-to-date, gold is one of the best performing asset classes of 2022, with a 4% decline.

Holding gold today is once again providing proven support to your portfolio – reducing overall draw-down levels and providing diversification against non-correlated paper assets. Economists are forecasting renewed weakness in the U.S. dollar later this year, as the Fed faces the reality that it will need to pull back on rate hikes to support the weak economy. And that will open the door for gold to power sharply higher, especially as inflation remains at red-hot levels.

Indeed, Goldman Sachs recently raised its year-end gold price target to $2,500 an ounce. For long-term investors, the current levels in gold offer an attractive buying opportunity. If you are considering increasing your allocation to gold, now is the optimal time to enter before the next powerful up leg in gold prices.

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