Gold and interest rates

Gold and Interest Rates

Nearly every major market is affected by rate hikes from the US Federal Reserve, and gold is no exception.

Higher interest rates bring macroeconomic headwinds to equity valuations, gold has had a special relationship with high interest rates.

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The rate of target federal funds is also known as the interest rate, which is the projected overnight rate for lending that banks, as well as credit unions use set by the U.S. Federal Reserve.

The Banks together with the credit unions should hold a given amount of cash reserves at the close of each day, therefore they can lend and borrow money from each other overnight to meet reserve requirements.

The target federal funds rate will give an interest rate within the range of 0.25% which the credit unions and banks should be within during interest rates determination for the overnight loans.

should Federal Reserve needs to reduce excess inflation and spending, it will raise the interest rates and further implements strict monetary policies, this will mark the starting point of a tightening cycle. This will go on to have effects of knock-on on almost all businesses and public-facing the rate of interest, as well as all other assets.

Does gold rise when interest rates increase?

Interest Rate

In 2019, the gold price was rising and falling. The few questions you need to ask yourself include, does the price of gold increase when the interest rate hikes? Is there a reason for the gold price to increase? How do cause and effect interact?

How Does the price of Gold Perform After Interest Rate Hikes?

As the interest rates rise at the time of tightening cycles, it will be profitable to hold onto and lend out the cash. This will result in de-risking of investors through selling the assets such as bonds and stocks.

At such a time, the investors will also seek out the uncorrelated assets which connected uniquely to such macroeconomic factors.

If the gold underperforms when compared to the dollar and US stocks resulting to rate hikes, in the 2000s, the past tightening cycles caused gold to hit new all-time highs

Will Gold Prices Rise Along With rising Interest Rates?

Gold and the increasing interest rates are not meant to go together.

In many occurrences throughout history, gold is meant to shine especially when the interest rate increases.

Gold price and interest rate relationship

interest rate relationship

Gold and interest rate relations have traditionally been negatively correlated. Obviously, there can be no certainty that gold prices will go up or down with interest rates dropping or up with interest rates increasing.

Rising interest rates have increased the value of bonds and treasury yields for investors. Higher rates of inflation reduce the appeal of these alternative assets, attracting investors to gold and resulting in high demand and prices. For this reason, gold can be an asset for financial difficulties.

Will Rising Interest Rates Derail The Gold Market

For gold to rise alongside interest rates would most likely mean that both investors and the powers that be are not especially confident of our economic future.

Rates are generally “allowed” to rise in an attempt to bridle inflation as a way to strengthen the currency. Conversely, gold is often purchased, among other reasons, when both citizens and investors believe that inflation is pretty much out-of-control or that the nation’s currency is weakening at an alarming rate.

will rising interest rates put a damper on this historic gold bull market? Given all of today’s uncertainty, it doesn’t seem likely.

The Correlation Between Interest Rates and the Gold Value

Usually, there is a negative correlation between gold and interest rates according to The World Gold Council. This happens when the interest rates rise, it is an indication of a strong and growing economy, thus giving the investors a lot of confidence to buy bonds and shares in the economy.

On the contrary, lower interest rates suggest concerns related to the growth of the economy, this generally will cause many investors to flock to more ‘safe haven’ type assets, like gold, which helps in protecting their wealth. The surge in the demand for gold will result in an increase in its value.

The relationship between Gold and interest rate

Gold price and interest rates are negatively related. As the price of Gold rises, will be a rising gold prices when interest rates go down, and down when rates go up. This is because when interest rates rise, stocks, government bonds, and other investments become more attractive to investors.

With a low-interest rate, the alternative asset will be less appealing; this will drive investors to invest in gold. resulting to an increase in the demand as well as price altogether. Gold is recognized as a store of wealth in times of financial difficulty.

What will happen when the interest rates rise?

The Growth in economic confidence will mean that the consumers and the expansion of businesses, with a greater disposable income, will tend to make a lot of borrowing. In this case, interest rates will rise. financial institutions or Central banks will be expecting greater returns from the loan(s) due to an increase in the cost of borrowing.

In such a time, safe-haven investment attraction will diminish, with rising interest rates which will strengthen the domestic currency, resulting in a decline in the short-term gold price. The Interest rate rises can be used as a means to reduce rising inflation. If the prices are rising so fast, central banks will increase the interest rates, This will encourage people to save money and reduce their spending, Which will reduce inflation.

What will happen when the interest rates fall?

The Rates may fall or just remain at the base rate (0%) as growth stagnate and economic confidence fades. the economic slowdown will usually hit wage growth, the living costs, as well as employment, and also devalue the nation’s currency. In these times investors turn to ‘safe haven’ gold to protect their wealth and the gold prices, based on trade in gold futures, will rise.

As precious metals such as Gold do not produce an annual yield, falling interest rates will mean that other investments are not making any extra annual income, further improving the appeal for gold.

Does the Fed rate hike affect gold Prices?

Interest rates are different for every nation, with varying impacts on their economies and the price of gold and silver in those countries. Rates in the US have a greater influence than most and because precious metals are predominantly traded in US Dollar, its interest rates have a particular impact on gold prices.

It follows that when the US Federal Reserve (also referred to as the Fed) hikes interest rates, this can have a profound effect on gold and silver prices. A hike will cause gold prices to decrease and this will help keep the value of gold high.

The bottom line

Given the historical tendency of the actual reaction between stocks prices and gold prices on interest rates increases, it is more likely that stock prices are adversely affected. So despite rising interest rates and gold prices drop, other factors such as the stock market and volatility coupled with global availability and demand will drive gold prices down.

Therefore before you make any form of investment decision, seek advice from your legal, accounting, financial, and tax advisers. Carefully you should consider the risks associated with investing in gold, taking care of your own interests.

Arthur Karter


Hi, I’m Arthur, and nobody wants to wake up in their 50s like me that they are in serious debt with minimal assets. This wake-up call forced me to reevaluate everything. After going through the school of Hard Knocks, I’m ready to help you by sharing the best retirement choices and how they differ from all the same-old, same-old options that financial advisors sell. These alternatives will help you build and protect your wealth.

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