International Bullion Firm Claims Gold a Good Insurance Policy

Analysts say prospects of higher rates does little to take away from the metal's appeal.

Last week the Federal Reserve met expectations by hiking interest rates for the first time in 2018. While gold's price trended lower in the aftermath of the hike, Kitco reports that one international bullion firm believes the prospect of higher rates does little to take away from the metal's appeal.

In their latest report, analysts at Degussa said that investors should view price dips as an entry point given the various factors that make gold investment a prudent strategy. Besides general protection against fiat currency manipulation, the firm pointed to the possibility of rate hikes leading to a recession as a particularly poignant reason to consider gold in one's portfolio.

Using the same analogy that multiple other analysts have turned to, Degussa explained how the Fed's hikes could ultimately have a major adverse effect.

"The Fed's tightening policy is like taking away the 'punch bowl,' and if it raises interest rates too much, the party would definitely come to an end. It is against this backdrop that gold, even in times of slightly higher real interest rates, is increasingly attracting investors, which has ultimately led to a price increase," said the report.

Although gold is mostly seen as an asset, the analysts noted that the view of the precious metal as global currency is gaining traction, namely because of inflationary pressures that erode faith in fiat money. Gold is frequently pitted against the dollar and soars in times of a weaker greenback, but Degussa's team noted that the metal continues to outperform a basket of global currencies.

"The price of gold should, over the long run, compensate its owner for the loss in the purchasing power of fiat currencies," the firm said.

The markets were near-unanimous regarding the likelihood of the latest hike, but there is plenty of doubt in regards to the Fed's future course of action. The Kitco article writes that while some believe the Fed could hike rates up to four times this year, especially given the hawkish tone of new chair Jerome Powell, others cast doubt on their ability to raise borrowing costs further.

According to Kitco, another factor that could play in gold's favor is a potential shift in the Fed's rhetoric. The central bank bases its current strategy on forecasts of a stronger economy and a lower unemployment rate, with hopes that inflation will reverse its backwards trend and meet the targeted rate. Despite their optimism, some market participants believe that the Fed will alter its prognosis in one or more areas, which would give rise to higher gold prices and serve as an additional deterrent from successive rate hikes.