Economists have long seen correlations between gold prices and interest rates. Just as the value of many other assets fluctuates with changes in interest rates, so does the price of gold. While gold prices are not a direct function of interest rates, they may be influenced by interest rates rising or falling along with other economic conditions. Follow along as I explore this relationship between gold and interest rates and how some experts have used this interconnection to monitor gold prices.
What drives the price of gold?
Gold prices and interest rates are correlated, however, the price of gold may be influenced by a number of factors. Much like other goods, supply and demand plays into the price of gold. Unlike most goods, though, the level of gold supply changes slowly as it takes ten years or more for gold deposits to be converted to a productive mine. That being said, demand is ultimately a more influential aspect.
Beyond supply and demand, other conditions and factors can influence gold prices. Furthermore, gold is sought after for more than financial purposes, including jewelry making and certain manufacturing uses. That means a variety of factors may influence the price of gold, such as:
- Gold production
- Jewelry demand
- Central bank reserves
- The value of the US dollar
- Economic and financial climate in the US and elsewhere
- National and international events and developments
- Market volatility
Still, interest rate fluctuations may best reflect the impact on the value of gold while helping to determine how prices may change as a result.
What happens when interest rates fluctuate?
The price of gold is not a direct function of interest rates, yet as rates change there seems to be a correlation between the two. This may be a result of the reasons behind fluctuations in interest rates and what happens when they rise and fall.
When interest rates fall
Interest rates often fall as a result of low confidence or concern in economic growth. This may lead to increased attention on more “safe haven” assets such as gold, as a means of wealth protection. As a result, gold prices may increase.
The COVID-19 pandemic is a perfect example of this correlation. During this time, the Fed dropped interest rates to the lowest point in decades to keep the U.S. economy afloat and minimize the impact of COVID-19. Gold simultaneously reached its highest price ever, trading for $2,067 per troy ounce in August 2020. Gold prices skyrocketed due to instabilities in the U.S. economy – just as interest rates were lowered for similar reasons.
When interest rates rise
When interest rates rise, this is often a sign of a strong, thriving economy. Typically, this means that “safe haven” assets may not be as attractive as assets like stocks and bonds become more attractive to consumers because holding onto and lending out cash becomes more profitable.
During these times, the Federal Reserve may want to curb excess spending and inflation and will raise interest rates and implement tighter monetary policy. Following these hikes in interest rates, gold has historically outperformed both the U.S. dollar and stocks.
Some gold buyers may monitor changes in interest rates to gauge when they choose to buy gold.
When is the right time to buy gold?
While no one can exactly predict changes in the economy, interest rates may help in identifying times that may be more advantageous to buying gold. Even the most expert gold buyers may watch the changes in interest rates to see how gold prices are impacted.
Gold, silver and other precious metals have historically retained value in times of inflation and economic uncertainty. When it comes time to buy gold, it’s imperative that you thoroughly research the types of gold products available such as gold bullion, bars and coins. Additionally, it’s important that you buy from a reputable dealer to reap the most potential benefits from purchasing gold.
Get more information on the potential benefits of buying gold.