The big financial news networks lately have been preaching that a recession is inevitable soon. Inflation is out of control, the Fed is raising interest rates, and stocks have been artificially pumped up from the Fed’s money printing. Investors are constantly wondering what they should do with their money as the stock market continues to look worse. The best performing assets lately have been commodities such as gold. Commodities increase in price during times of harsh economic conditions like what we have seen in 2022.
Inflation causes Fed to hike rates
As inflation spirals out of control, the prices of commodities and food have been on a rapid increase. This has caused the Federal Reserve to hike interest rates. They do this by increasing the effective federal funds rate, which means the banks pay more to borrow money from each other. Some experts fear that the rapid increase in rates will lead to a recession. The Fed plans to execute its plan effectively and control inflation without crashing the economy. Some experts do not believe this is possible.
Signs of a recession
Fed Chairman Jerome Powell is optimistic and claims they can effectively fight inflation without tanking the market. This is a possibility, but history shows that 8 out of the 9 times the Fed raised rates to tame inflation we went into a recession. Former US Treasury Secretary Larry Summers believes that the Fed’s wishful thinking is absurd and delusional.
Stagflation is a topic investors have been contemplating as we see inflation rise. Stagflation is the combination of high inflation and an economic slowdown which is a high probability case for the coming years. If we start seeing a slowdown in real GDP growth, then the Fed would most likely step in to counter it with more quantitative easing (QE).
Yield curve inversions are also a common recession indicator investors look at for reference. The yield curve is considered inverted when short-term bond yields are higher than longer-term bond yields. For the first time since 2006, the 5-year and 30-year yields inverted which caused some investors to panic. Every recession in the last 60 years has followed an inverted yield curve. However, some of these recessions occur a whole year after the curve inverted. This means it can be hard to time the top even when these warning signs flash.
Investing during a recession
With all this information in mind, you may be wondering where to put your money during these harsh times. Investing in gold has proven to hold its value during a recession while providing a decent return. Assets like stocks are at major risk of a drawdown as the economy continues to get worse. Holding cash is getting destroyed by inflation. Bonds are providing negative real returns since inflation rates are much higher than bond yields. Real estate has been an inflation hedge, but home prices can be just as volatile as stocks. Therefore, gold is one of the best places to put your money for the coming years.