Understanding the Relationship Between Interest Rates and Investing in Precious Metals
Precious metals like gold and silver are commonly used for investment purposes across the world. By the end of 2020, the second most common use of gold was as investment, followed by jewelry which remained the top use. Approximately 495 metric tons of gold were used for investment purposes.
However, there are quite a few factors you need to take into account, like the interest rate and rate of inflation, before deciding to invest in precious metals. These factors can affect the value of precious metals and can make them a poor investment if not planned properly.
Keep reading this blog to learn more about how interest rates and investment in precious materials are connected.
A Rise In Interest Rates
Interest rates rise when the economy is doing well, businesses expand, and people have a higher disposable income. With a higher income and an environment conducive to business expansion causes people to borrow more.
This situation causes a rise in the interest rates, and financial institutions expect a higher return from the loans they give.
An increase in interest rates also bolsters the domestic currency and the need for safe haven investments like gold coins and bullions decreases. In such a scenario, it’s common for the short-time prices of precious metals like gold to go down.
Falling Interest Rates
When the economic confidence weakens and there’s little to no growth, the interest rates fall or stay at the base rate. The fall in economic growth affects businesses, cost of living, wages and often increases unemployment. There are also high chances that the domestic currency will also be devalued.
Because people can’t afford to borrow money, central banks lower interest rates to encourage them.
In times when economic confidence pales, investors find investing in precious metals is safer. And based on trading in gold futures, the prices of gold prices go up.
The Fed Rate Hike
Although it’s commonly believed that there’s a negative correlation between interest rates and prices of precious metals, a detailed examination of historical data suggests that there might be temporary positive relationships at times.
Rates in the US have a greater influence on metals like gold compared to other economies. Because gold is most commonly traded using US dollars, its interest rates have a stronger impact on the price of gold.
The precious material commodity market’s behavior changes when the Federal Reserve increases interest rates.
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