Rising Interest Rates and Gold’s Price Performance

Posted - May 17, 2023
Rising Interest Rates and Gold’s Price Performance

Is There a Correlation Between Interest Rates and Gold Prices?

The question on many investor’s minds is: what happens to the price of gold amid rising interest rates? According to the NASDAQ Composite, there’s little correlation between interest rates and the price of gold. Recent historical trends routinely suggest that despite the rise in interest rates, gold prices will not be negatively affected. This actually turns out to be one of the main reasons why investors put their money on non-correlated assets like gold bullion. 

Rising Interest Rates and Gold's Price Performance

The article cites two examples from the past 50 years. In the 70s, amid booming inflation and incredibly high interest rates, the price of gold rose across the board. In the 80s, once inflation eased and interest rates dropped, gold also dipped in value. As well, from 2004 to 2006, when rates increased from 1 to 5 percent, the value of gold launched once more. If a correlation is to be made, it’s that gold prices and interest rates tend to rise and fall together. 

Gold Price Performance Against Rising Interest Rates

The price of gold is generally determined by supply and demand and not outside economic conditions. So, the general answer here is that the price of gold is not reliant on interest rates. However, gold’s value can and often is affected by other economic conditions. 

Most anyone in the investment game knows that the value of gold works very well as a hedge against a weakening dollar or inflationary conditions. When the dollar begins to lose its value, the price of gold pops. Likewise, when the dollar strengthens, gold can and often does lose ground against a bullish buck. Of course, interest rates play a part in these conditions but they don’t historically have any direct effect on gold price performance. 

During periods of extreme economic insecurity or dissatisfaction with the stock market, gold tends to perform quite well. Gold coins are a great option for investors who want to diversify their portfolios with a non-correlated asset. While this isn’t always the case and no investment framework is foolproof, adding gold bullion to your portfolio might be a great way to respond to troubling economic trends. After all, gold holds intrinsic value, meaning that it isn’t quite as linked to the performance of the market as other, more traditional investments. 

Another causation here is that gold is traded on a global level. As a result, its influence is well beyond the reach of the Federal Reserve and their reactionary policies. The value of gold is reliant on a number of factors, including market speculation, supply and demand, and other key indicators of price movement. 

The Price of Gold vs Other Assets in a Rising Interest Rate Environment

Rising interest rates are designed to work against inflation. One of the ways it does this is by providing for strong investment opportunities throughout the market. Many believe that an increase in interest rates means that investors might abandon gold in order to pursue traditional stocks and short-term government bonds but, as we have pointed out, the value of gold easily holds during these questionable times.  

This is because gold has a strong reputation as a proper safe haven investment. Its slow but consistent growth over the years tells its own tale. While other investment opportunities can become volatile in troubling times, the value of gold generally works in tandem with the fed fund rate.

As the old saying goes, steady wins the race. Well, it doesn’t get more steady than gold. Yes, gold will have its bearish moments but, as history suggests, the value of gold is more often positively affected against rising interest rates. 

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