Banking » Investing » Bank CDs or Gold Investment: Which Is Better Against Inflation?
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Bank CDs or Gold Investment: Which Is Better Against Inflation?

While CDs provide 3-4% APY, gold investing is an excellent hedge against inflation. What are the differences and which is best for you?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Table Of Content

CDs Vs. Gold: The Main Differences

Here are a few major differences between CDs and gold:

  • Certificates of Deposit, or CDs, are financial products offered by banks and other financial companies. Gold is a physical commodity although exposure to changes in gold prices can be gained in other ways: investing in a gold mining company, for example.
  • CDs pay regular interest (like a savings account) while gold offers no return while holding the asset and comes with storage and insurance costs.
  • CDs are guaranteed by the Federal Deposit Insurance Corporation (FDIC) to pay back the principal investment. The gold price is market-determined and can drop suddenly if buyers feel it is over-priced.
  • Between regular interest payments and the final principal repayment, the return on a CD is known with virtual certainty. Gold fluctuates based on supply and demand, inflation, shifting investor sentiment and other factors.

How CDs and Gold Provide Inflation Hedges?

Gold has been shown to exhibit price growth when there is rising inflationary pressure and deepening concerns about future economic activity. Reasons for the popularity of gold, especially when things start to go bad, include:

  • Gold’s historical role in international currencies and as a medium of exchange
  • Limited new gold supply allows for a stable market
  • Strong cultural significance (i.e. wedding bands, heirlooms)

For the above reasons, gold is classed a “safe haven” asset during troubled times; this finding has been confirmed even through the pandemic by observing where worried investors flocked.

CDs, on the other hand, are generally not the first place investors go to protect themselves from inflation. The biggest reason investors might avoid CDs is that the interest rate on a CD is fixed and will not budge as inflation rises.

For example, if you buy a CD with an interest rate of 2% for a 5-year term and inflation happens to spike at 10%, you still receive the same interest and principal payments as though inflation were non-existent.

Were you to decide on a different investment during those 5 years, your bank would also penalize you and be well within their rights. That said, CDs can be part of an investment strategy to deal with inflation under the right circumstances.

Investing in Gold In High Inflation: Pros & Cons

Gold offers a few ways for the everyday investor to buy in. The most direct way is to buy bullion at your local dealer or bank. Jewelry and other coins also qualify but these may not move in a “one-for-one” fashion with the price of gold and care should be taken to assure any dealer’s reputation.

For those not interested in being able to touch their gold, exchange-traded funds (ETFs) and gold mining stocks are easily available by opening a brokerage account. ETFs will track closer to actual gold prices and cut out the ups and down from factors unrelated to gold, such as company management.

Buy Physical Gold

Pros
Cons
Historically “safe” in downturns
Storage/insurance costs against theft
Physical asset
No dividend or other return while holding

Buy Gold ETF

Pros
Cons
Liquidity
ETF management costs
Higher exposure to gold price than stocks
Leveraged” funds may lose even more if price drops

Buy Gold Stock

Pros
Cons
Dividend
Exposed to other factors beside gold price
Potential to gain if stock market does better than gold price
Trading commission to purchase/sell

Investing in CDs In High Inflation: Pros & Cons

Certificates of Deposit, or CDs, are issued by your bank (or other financial institution) and guaranteed by the FDIC up to $250,000. They are considered one of the safest assets available and popular among retirees and those seeking dependable income. CDs are usually short- to medium-term investments, maturing in 5 years or under.

You can ask your bank about their current CD rates or shop online for CDs being offered elsewhere. If you have a brokerage account, you may have access to CDs there but the minimum required investment is usually higher: $10,000 and up.

Most people seeking income will “ladder” their CD purchases by buying every few months or years. This strategy helps investors keep up in a rising rate environment like we are currently experiencing. Others, seeking protection from losses in stocks (and other markets) or to save for short-term goals (like buying a house), will invest short-term and roll into another short-term CD at maturity.

  • Fixed interest rate over term of CD (helps in planning retirement income or to protect from rates dropping)
  • Guaranteed repayment of principal at the end of CD’s term
  • Keeps emergency or down payment funds out of reach over term of CD, helping investors to reach short-term goals
  • CD interest rate will not adjust with inflation over its term
  • Penalties are charged for early redemption if you change your mind
  • Historically, not an attractive long-term investment as returns fall short of inflation and most other assets

How Much Can You Earn If You Deposit $100,000 in CDs?

In case you deposit $100,00 to CDs, here are the expected earnings (before tax) in case the APY is 4% and compounded daily:

CD Term
Interest Earned
6 Months
$1,992
12 Months
$4,024
18 Months
$6,096
24 Months
$8,210
30 Months
$10,365
36 Months
$12,564

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CDs vs Gold Investing: Key Things to Consider

CDs and gold each have their place in an investment strategy at one time or another. Below are some scenarios that show the key considerations:

  • Short-term savings goals should not be put at-risk for capital losses (i.e. investment of $100 now worth $95). Stocks, including gold mining companies, can plummet in a bad trading session, leaving you with less than you need for a down payment. Gold faces this same risk.
  • CDs are federally guaranteed to return 100% of your principal investment plus any interest in the contract.
  • CDs are great for short-term goals but fall behind alternative investments over long horizons. It’s okay to take risks if quality investments are allowed the time to bounce back from recessions and other economic shocks, which will inevitably occur.
  • Inflation is not over: 2022 has been a sharp reminder that it can pop-up all of a sudden even after a long dormancy.
  • Gold offers some protection in downturns. As one piece of a portfolio, gold bullion, a gold ETF or mining stock can offset losses elsewhere.
  • Retirement is when you need predictable income (preferably inflation-adjusted) to cover your expenses. Federal retirement programs do adjust with inflation but struggle to keep pace.
  • Depending on selling assets, such as a house, is not a winning income-generating strategy.
  • CDs, if they are “laddered” to handle changing rates, can offer income predictability.
  • If the retirement nest egg is large enough and you are early in retirement, some inflation protection from a gold ETF, inflation-protected bonds may make sense.

When Does It Make Sense to Choose a CD?

CDs are attractive for short-term savings or steady income generation. The federal guarantee offers peace of mind to CD investors, who are generally risk-averse and not concerned with upside available in stocks and other risky securities.

The type of investor CDs appeal to deliberately avoid markets where wild price swings, bankruptcy and stiff competition predominate.

Which Banks Offer the Highest CD Rates?

In 2022, the FED significantly raised the Federal Funds rate, which has led to greater rates on CD deposits. Here are a few banks that sell CDs at attractive rates:

Bank/institution
APY CDs

capital one bank logo

Capital One
3.90% – 5.00%
Review

discover bank logo

Discover Bank
3.75% – 4.30%
Review
synchrony-bank-logo
Synchrony Bank
UP TO 5.10 %
Review
american-express-bank-logo
American Express Bank
Up to 4.50%
Review
Marcus logo
Marcus
3.90% – 5.10%
Review

When Does It Make Sense to Invest In Gold?

Gold rears its head when the markets are jittery, people are afraid of economic collapse and currencies unstable. At these times, people turn to a small subset of investable assets (known as “safe havens”) in the hope of sustaining wealth and protecting against inflation, with possible upside if fears reach fever pitch.

Gold shines even brighter to those worried that paper money and global financial institutions will crack or fall apart, leaving us to rely on bartering and historical stores of wealth.

These fears seem debatable if we look back over the last 50 years, but over centuries and millennia any student of history can see previous civilizations (and their currencies) have all collapsed.

How the Fed Interest Rate Hikes Impact CDs and Government Bonds?

The US Federal Reserve has gone into overdrive in 2022 to control runaway inflation not seen in a generation. To do this, the Fed has increased a critical interest rate (the Federal Funds Rate, or FFR) again and again, forcing banks and all lending institutions to charge higher rates to borrowers.

 

CDs and government bonds offer interest rates impacted by the FFR so they too have been impacted this year. It’s important to note that individuals generally cannot invest directly in government bonds but instead buy mutual funds and ETFs which buy government bonds, also called treasuries.

CD and government bond rates will depend on a few characteristics of each over the next while:

CDs

  • Rates depend on the bank’s (or other financial institution’s) need for funds, which they then lend out. This makes it advantageous to shop around when thinking of buying a CD
  • If the FFR keeps rising, which it is anticipated to do until early 2023, CD rates will too
  • If the prospect of economic growth returns, longer-term CDs will offer more and more attractive rates compared with short-term CDs

Government Bonds

  • Several types of government bonds exist ranging from fixed-rate to floating/variable-rate and even inflation-protected TIPS. While continued FFR hikes make existing fixed-rate bonds less attractive (they pay lower than “market” interest rates), they also making floating and inflation-protected bonds, as well as new fixed-rate bonds, more attractive
  • Some investors, because of the high rates on offer for “safe” bonds, will sell out of stocks and move that cash into bonds, including treasuries. With less supply (the Fed is reducing its balance sheet, hence not issuing as many bonds) and greater demand, the price for bonds could gain in the near-term

Inflation is notoriously difficult to predict, even for the well-equipped Fed, and can remain high for longer than everyone is comfortable with.

The US has experienced inflationary periods before (most recently, the 1970s and early 80s) that were destructive to growth, hard to reign in for the Fed and politically destabilizing.

At other times, the Fed has capably clamped down on inflation. For these reasons, and depending on circumstances, it is usually best to diversify and take precautions.

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Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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