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How Gold Price and Interest Rate Trends Are Related

If you’ve got your eye on precious metals or already have some in your portfolio, you may be curious to know how interest rate hikes like those we’ve recently experienced may impact these assets. How is a tangible asset like gold affected by interest rate fluctuations or factors associated with interest rate fluctuations, like yields on government bonds?

How are gold and interest rates correlated?

The relationship between interest rates and gold isn’t as clear-cut one might think. Like any asset, gold may be impacted by any number of variables. Interest rates, the federal funds rate, bond yields—all have different relationships to, and potential consequences for, the price of gold.

What happens to gold prices when interest rates drop?

Historically, when interest rates have plummeted, buyers looking for relatively safe and lower-risk assets have tended to turn toward gold. This demand, among other factors, has contributed to a pattern of negative correlation between low interest rates and gold. According to Investopedia, some believe the price of gold may decrease when interest rates lower, but there are too many other factors at play to say so definitively. Like most things financial, it’s not this simple.

While gold prices can be impacted by falling and rising interest rates, they can also be impacted by something called the federal funds rate.

The federal funds rate is the interest rate that banks and credit unions charge each other for overnight loans. Set by the Federal Reserve—the central bank that sets monetary policy for the United States—this interest rate is often increased or decreased in response to domestic and global economic factors. In turn, changes to the federal funds rate may be reflected in changes to interest rates on credit card debt, savings accounts, certificates of deposits, mortgages, auto loans, and more. Because the federal funds rate informs interest rates across financial markets, as previously discussed in this article, it may also indirectly affect the price of gold.

What happens to gold when interest rates rise?

If low interest rates are typically associated with the rising price of gold, then high interest rates must mean the price of gold will drop, right? Not necessarily. One of gold’s many benefits is that it is considered a long-term option that stands the test of time. So while it may be the case that gold prices drop when interest rates are high, over the long term, its prices have historically risen.

If prices do experience a dip, it may be a great time to add gold to your portfolio because you may be able to purchase more with the same budget and potentially watch your gold continue to grow as interest rates inevitably shift again. This is part of gold’s strength—that historically, it has continued to rise over the long term despite changes in interest rates.

How do bond yields affect gold?

Treasury bond yields seem to have a more consistent relationship with gold than interest rates. When bond prices have fallen, the price of gold has tended to rise. In a low-bond-yield environment, asset holders often seek portfolio alternatives like gold.

According to the World Gold Council, “Gold enjoys a number of advantages over Treasury bills, making it a welcome supplement to a portfolio’s liquid-asset holdings and an effective diversifier…. [Gold] bullion is an anonymous asset independent of any government’s policy and an international currency free of national boundaries.”

Should you buy gold now?

Some analysts believe gold is a go-to safe haven in times of economic turmoil. In an April 2020 CNBC interview, respected analyst George Milling-Stanley made a case for gold as an attractive asset in uncertain times, recommending that gold make up as much as 10% of a portfolio. But you don’t have to wait until times of trouble to take steps to protect your finances. Diversifying your portfolio is a great way to help lower your risk and protect yourself from market instability. Buying precious metals like gold will not only serve to diversify your portfolio, but also act as a form of wealth insurance for years to come.

No matter what’s happening in the financial world, gold can be one way of hedging your other assets against uncertain market movements. If you’re setting yourself up for retirement and want to feel more secure in your financial future, it may be a good time to learn more about how gold and precious metals can help protect your portfolio against risk. Milling-Stanley agrees:

“In my view, gold is a hedge against the unexpected, whether it is a hedge against macroeconomics or geopolitical [issues] like wars or pestilence,” he said. “It has always been protection against the unexpected, whatever that might be. Gold tends to perform whenever anything unexpected happens.”

Regardless of where interest rates stand, adding gold to your portfolio may help reduce its overall risk exposure in times of economic uncertainty. Find out how you can diversify and safeguard your portfolio with gold.

Call 1-844-307-1589 and speak with your U.S. Money Reserve Account Executive today.


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