Gold and interest rates have a special relationship. Historically, when the Federal Reserve cuts rates, gold prices tend to rise and when rates are raised by the Fed, the price of gold tends to fall. This is called negative correlation.
The current Federal Funds rate is 4.25% – 4.50%, and the Fed has held rates steady throughout 2025. The Federal Open Market Committee (FOMC) cut rates in September 2024 (-50), November 2024 (-25), and December of 2024 (-25) after steady increases throughout 2022 and 2023.
It is widely speculated that the FOMC will once again cut rates later this year, and this suggests a favorable environment for gold prices.
Why Gold Tends to Rise When Rates Fall
When interest rates are cut, gold and other precious metals tend to become more attractive for a host of reasons:
1) Safe Haven Appeal – Interest rates are typically lowered during periods of economic fragility or as a precursor to a weakening economy. Gold has always been considered a financial safe haven, so any signs of an economic recession or downturn will drive investors to gold and increase demand.
2) Opportunity Cost – “Opportunity cost” is the potential lost profit from a missed opportunity, i.e. the result of choosing one asset over another.1https://www.investopedia.com/terms/o/opportunitycost.asp The opportunity cost of buying gold, a non-yielding asset, decreases in a low-rate environment because other assets like bonds, savings, and cash become less attractive.
3) The Value of the Dollar – Gold’s negative correlation to the value of U.S. dollar has long been considered a trigger for higher gold prices as Forbes outlines below:
“For decades, the prevailing narrative has been simple: When the dollar weakens, gold strengthens, and vice versa. This inverse relationship has been explained due to gold being primarily traded in U.S. dollars. A weaker dollar makes gold cheaper for buyers using other currencies, potentially increasing demand and price. Second, gold is often seen as a hedge against inflation, prompting investors to turn to it when the greenback falters.”2https://www.forbes.com/councils/forbesfinancecouncil/2024/09/12/the-gold-dollar-connection-insights-for-investors/
Has Gold Decoupled from the Fed?
But this longstanding view of the relationship between interest rates and gold may only apply in certain conditions. Over the last few decades, it appears that the price of gold has continued to rise during both low and high federal fund rate environments.
According to Kinesis Money, a gold and silver investment platform, the relationship between interest rates and gold is more related to the erosion and depreciation of paper money.
“Physical gold and silver are often a cornerstone in many investment portfolios and are seen widely as a wealth preservation hedge against the ongoing devaluation of fiat currencies by Central Banks globally. Over time, gold has been moving higher regardless of the level of the Fed funds rate.”3https://kinesis.money/blog/precious-metals/fed-funds-rate-impact-gold-silver-price/
Similarly, Investopedia points out historic instances of gold rising in tandem with the federal funds rate:
“A study of the massive bull market in gold that occurred during the 1970s reveals that gold’s run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising. Short-term interest rates, as reflected by one-year Treasury bills (T-bills), bottomed out at 3.5% in 1971. By 1981, that same interest rate had more than quadrupled, rising as high as 16%. In that same period, the price of gold mushroomed from less than $200 an ounce to a previously unimaginable price of nearly $2,000 an ounce. Gold prices had a strong positive correlation with interest rates, rising in concert with them.”4https://www.investopedia.com/articles/investing/100915/effect-fed-fund-rate-hikes-gold.asp
The Smile Profile
While low rates, economic uncertainty, and market volatility are still favorable to gold prices — analysts at J.P. Morgan concur that one of the most compelling and persuasive arguments for holding gold is its role as a critical hedge amid the eroding value of world currencies.
“Given gold’s diverse and fluid drivers of demand at the moment, the metal has recently served both as a debasement hedge — or a form of protection against the loss of purchasing power of a currency due to inflation or currency debasement — and in its more traditional role as a non-yielding competitor to U.S. Treasurys and money market funds. This means gold has developed what’s known as a ‘smile profile’ to U.S. yields, where it has risen in both periods of falling and rising U.S. real yields for different reasons.”5https://www.jpmorgan.com/insights/global-research/commodities/gold-pricesThe Federal Reserve is generally expected to cut rates in September. This will likely be yet another boost for gold prices, but the precious metal has proven to be a viable portfolio asset that has soared in periods of both higher and lower interest rates. This debunks the traditional schools of thought that see gold purely as a short-term haven and crisis asset amid economic slowdowns and/or recessions.
Gold’s recent price surge supports its strength amid periods of inflation, economic uncertainty, and geopolitical instability as well as the systemic and seemingly irremediable threats of growing public debt, excessive money printing, and world currency depreciation.
It is this revelation that has global asset management firms like T. Rowe Price recommending that investors consider holding gold to establish a well-balanced, resilient, and multi-asset portfolio:
“Since late 2022, the long-term inverse relationship that has existed between gold prices and real interest rates has decoupled. This reflects the growing influence of global fiscal policies and currency debasement, a sharp rise in central bank buying, as well as an environment of heightened geopolitical risks. From an investment perspective, we believe it is prudent to consider some exposure to gold as well as a diversified set of other commodities, through commodities-related equities.”6https://www.troweprice.com/institutional/us/en/insights/articles/2024/q4/what-is-driving-gold-prices-to-all-time-record-highs-na.html
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- https://www.investopedia.com/terms/o/opportunitycost.asp
- https://www.forbes.com/councils/forbesfinancecouncil/2024/09/12/the-gold-dollar-connection-insights-for-investors/
- https://kinesis.money/blog/precious-metals/fed-funds-rate-impact-gold-silver-price/
- https://www.investopedia.com/articles/investing/100915/effect-fed-fund-rate-hikes-gold.asp
- https://www.jpmorgan.com/insights/global-research/commodities/gold-prices
- https://www.troweprice.com/institutional/us/en/insights/articles/2024/q4/what-is-driving-gold-prices-to-all-time-record-highs-na.html
