The Impact of Rising Interest Rates on Gold
A lot of investors have the misconception that there is a negative correlation between the price of gold and interest rates. While a rise in interest rates does increase the yield for government bonds, it doesn’t diminish the attraction investors have for gold. This is evident from the fact, that the high gold prices in the 21st century coincided with high-interest rates. Similarly, gold gained 49% between 2004 and 2006 when the Fed hiked the rate from 1% to 4%.
Find out more about the impact of rising interest rates on gold prices in this blog.
Sign Of Volatility
Rising interest rates are a sign that the economy isn’t doing so well and people’s purchasing power is going down. This is why the Fed raises the benchmark rate to control inflation. Usually, this happens when there is a lot of cash in the economy floating around, pushing up the prices of different products.
However, sometimes the rise is due to supply-side factors similar to the one the world is in the grips of today. Russia’s invasion of Ukraine led to sanctions on the country that pushed up the price of oil. This led to the cost of living outpacing wages. When consumer spending starts going down, inventory stockpiles rise with retailers. This further dampens the confidence of the investors.
Fear Of Recession
When interest rates rise, paying off debt becomes more expensive. This leads to expenses eating up the profits of companies and lowering dividends. The market responds with a sell-off amid fears that a recession is coming. There are also fewer investments in infrastructure and business expansions.
While some funds do go to the bond market, a large number of investors also start exploring alternative investment options, such as precious metals like gold. Gold is a proven hedge against inflation because of its consistent record of being a good store of value.
Real Factors at Work
Precious metals such as gold have real supply and demand factors that influence their prices. These factors are also outside the influence of the federal reserve. For instance, there is a strong demand for gold jewelry in countries such as India and China.
Similarly, there is strong demand from central banks, looking to diversify away from the dollar by investing in precious metals.
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