The Federal Reserve launched onto center stage this year when it delivered its biggest interest rate hike in decades to combat surging inflation. While U.S. interest rates are rising now, the central bank kept interest rates at zero percent coming out of the Covid crisis.

In fact, while inflation climbed steadily higher in late 2021 into early 2022 – and you were paying more for everything from gas to groceries – the Fed sat on the sidelines. Indeed by the time the Fed first hiked interest rates in March 2022, the Consumer Price Index had already hit 8.5% – well above the Fed’s stated target of inflation at 2%.

Many believe the Fed simply kept monetary policy too loose, for too long – and the 40-year high inflation is now the result.

The Federal Reserve is tasked with a so-called “dual mandate” to pursue both maximum employment and price stability. It uses its monetary levers (including raising and lower interest rates) to help achieve those goals.

Coming out of the Covid crisis, the Fed repeatedly said it expected inflation to be “transitory” – yet a variety of factors conspired to extend inflation’s presence (Russian war in Ukraine, supply chain issues and more). As the economy recovered from the Covid recession, the Fed made a choice to favor its goal of maximum employment and stated a willingness to allow inflation to exceed its target to help ensure that all Americans who wanted jobs could find them.

Yet, many believe the Fed made an inflation policy error and the central bank was just simply late to attack the red-hot trend of rising consumer prices. Now, higher prices have already become entrenched in the economy.

The Fed has already made one mistake this year. Are they set to make another?

The Fed is currently on a path to sharply raise interest rates to try to tamp down interest rates, but that means it could cause another economic problem: a recession.

Some on Wall Street are wondering if the Fed will indeed be “humble and nimble” when it comes to raising interest rates as Fed Chair Jerome Powell stated in January. Will the central bank recognize the economic pain a recession will levy on Americans who are already facing 40-year high inflation levels? Or will the Fed continue on their path and cause a recession.

Gold is expected to begin a new advance in the second half of the year, fueled by worries about recession and the on-going high inflation environment. The Federal Reserve has created a unique economic brew that we haven’t seen since the 1970’s – economists call it “stagflation” or a period of weak economic growth and high inflation.

While you can’t control the Fed or the economy, you can take action to protect and hedge your investments in these extraordinary times. Gold is the best stagflation performer since 1973 with a 12.8% annualized return, according to a Gold Hub investment update.

“Real assets do well during stagflation, with commodities both fueling and feeding off inflation, while gold has tended to benefit from the elevated risk environment, rising inflation, and a lowering of real interest rates. Gold’s strong returns come despite a stronger US dollar typically seen during stagflation,” Gold Hub said.

Goldman Sachs recently raised its year end gold price target to $2,500 an ounce. The next leg up in the gold market appears to be right around the corner.

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Unfortunately, many investors today see plenty of bad news no matter where they look.

Consequently, more people are considering how an investment in gold can buoy their portfolio. For this reason, it is important to understand the nature of gold during periods of economic uncertainty. Research published in the Journal of Banking & Finance offers some answers.

The researchers explored a 30-year period spanning 1979 to 2009. Their findings reveal one simple truth: “gold loves bad news.”

However, their work also underscores some of the unseen characteristics of gold in a crisis. These are three key takeaways:

Gold Tends to Work Best as a Haven in Developed Countries

The researchers note that “gold was a strong safe haven for most developed markets during the peak of the recent financial crisis.” However, the effect is less pronounced in emerging markets. Despite this difference the researchers conclude that gold “has the potential to act as a stabilizing force for the global financial system by reducing losses when it is most needed” because the haven effect is present not only in the US but also in Eurozone markets. The researchers also offer one hypothesis that might explain the reduced safe haven effect in emerging markets. They suggest investors likely liquidate their emerging market investments during periods of declining performance and purchase equities in developed markets instead.

The Word “Haven” Is Frequently Misunderstand

The word “haven” and “hedge” are sometimes used interchangeably. The differences between the two, however, are considerable. The researchers explain that a hedge is an asset that is negatively correlated with another asset in the same portfolio on average. This description is different than a haven asset which is also negatively correlated with another asset in a given portfolio but only in certain periods like a downturn. What this distinction tells us is that the two words represent two different periods. A hedge relates to the long term, while a haven relates to the short term. When forming an investment selection, it is important to be aware of this difference when an asset is labeled as either a hedge or a haven.

Specific and General Uncertainty Have Important Distinctions

Most market uncertainty can be classified as either “specific” or “general.” Specific uncertainty emerges from a narrowly defined event. In contrast, general uncertainty refers to any uncertainty that is not connected to one particular event. This difference matters because the researchers focused their study on gold movements during periods of general uncertainty. They learned that a rise in general uncertainty often increases investor interest in gold. However, when this uncertainty becomes extreme, gold has a higher probability of moving in the same direction as equity markets.

The evidence is clear…gold plays a valuable role in a portfolio designed to weather the unforeseen and periods of uncertainty. Investors should take the time to understand the nuances of gold’s performance during downturns in equity markets. The country, the duration, and the type of uncertainty are all important factors.

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Using a baseball analogy, 2022 threw Americans a lot of curve balls that no one was expecting. We’ve seen gasoline rocket above $6 a gallon, mortgage rates soar from 3% last year to 6% today and the stock market tumble over 20%. Everyday goods simply cost more with inflation at a 40-year high. The cryptocurrency market collapsed – with Bitcoin falling from over $67,000 in late 2021 to just over $17,000 last week.

Amidst the market turmoil, gold has delivered as a solid safe-haven investment – and is one of the year’s best performing asset classes.

Gold is up about 1% in late June – and is holding up vastly better than other assets classes which are down a staggering 20% to 70% from their peaks.

This is a reminder of why allocating a portion of your portfolio to gold pays off. Investors who own gold have seen more stability in their portfolio, with less drawdowns than those without gold exposure. Gold is acting as a store of value to protect your wealth.

With the S&P 500 now officially in a bear market, Wall Street analysts are warning the stock market rout could still get worse before it gets better. Société Générale issued a research note this week stating that if the Federal Reserve fails to tame inflation an economic recession could push the S&P 500 down another 33%.

And what about gold? Increasing your allocation to gold now is an option to preserve and protect your wealth.

One of the factors holding the gold market steady right now – is the strong U.S. dollar. Gold and the dollar often trade inversely – so the current strength in the dollar is a headwind for the precious metals. The U.S. dollar index is up around 9% year-to-date.

However, eventually the dollar rally will stall and “that is when the gold price will take off,” Will Rhind, founder and CEO of ETF provide Granite Shares told Barron’s.

Indeed, earlier in June, Goldman Sachs released a new report stating: “We expect a rebound in emerging market gold demand in the second half of the year. In the absence of a large liquidity shock, we view current gold price weakness as a good entry point.”

Do you have cash on the sidelines ready to go to work? Preserve and protect your wealth with gold. Goldman Sachs issued 3- and 6-month targets at $2,100 and $2,300, respectively. In 12 months, the bank expects gold to reach $2,500.

Precious metals are an insurance policy that has consistently paid off for investors in all types of market cycles, and we are seeing that happen again today.

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