The currency and commodity markets are showing early signs of reversal in interest rates. Many asset managers are selling U.S. dollars and buying other currencies in anticipation that the Fed will begin interest rate cuts next year. Let me tell you, these hedge fund managers also predicted the 2022 tech bubble burst in December 2021 and sold their tech stocks. Hence, it is important to keep an eye on what they are buying and selling and plan your portfolio accordingly.
The correlation between interest rate and gold
Interest rates and the falling dollar are often associated with gold price appreciation. Why so? The dollar is considered a safe haven. When the dollar weakens, demand for alternatives increases and the best alternative to the U.S. dollar is gold. The dollar weakens when interest rates fall, as the Fed makes it cheaper to get a U.S.-denominated loan. But that alone is not sufficient. The economic situation also plays an important role in determining gold prices.
In the 2020 pandemic, the Fed reduced interest rates to 0.25% and pumped dollars into the economy. An abundant money supply reduced the dollar value and boosted Barrick Gold stock price by 80% in fewer than three months (March 13, to May 15, 2023).
This inversely proportional relation between interest rate and gold can help protect your portfolio from the upcoming turn of events in 2024.
Is gold the answer to the interest rate dilemma?
In November, the U.S. dollar index fell to its three-month low amid the fund manager’s selling activity. When the U.S. dollar falls, the gold price rises. That is exactly what happened. Gold price surged to its six-month high, sending Barrick Gold (TSX: ABX) stock up almost 13% since November 12.
The U.S. Fed has hinted at a rate cut in 2024, as October inflation eased to 3.2%. While the Fed says it might not cut the rates more than 50 basis points next year, fund managers feel otherwise if the economy feels recessionary pressure. A sharp rate cut could send gold prices zooming upwards and hedge your portfolio declines.
If a recession occurs, the price of gold could shoot up over 50% within months and stay at a higher level till the economy revives. It is because the economy’s strength determines the strength of the dollar. And if America averts a recession, Barrick Gold could give you moderate growth and over 2% dividend yield.
Investor takeaway
At present, gold is an opportunistic investment, as the economic cycle turns from high to low interest rates. You could consider investing a slightly higher amount in Barrick Gold stock now and selling it in three lots: the first lot when it reaches $30, the second at $32, and the third at $35, depending on how the economic situation turns out.
