Why Gold Struggles To Attract Investors as Interest Rates Rise
The global market of gold exchange funds (ETF) saw an unprecedented net outflow of over 9 billion dollars in 2021. This amounts to 25.5 tons of gold taken off the market over the full year. This has created uncertainties for investors about investing in precious metals in the year 2022 and raised the question: do high-interest rates cause gold to underperform in the market?
Our Early Thought
We’re as concerned about the declining rate of gold in 2021 as anyone else who has studied the behavior of gold in the market, especially when the interest rates are high. Traditionally, no such correlation has been detected between gold and the global interest rates.
If anything, gold has performed better when the interest rates were high, as observed in the great gold-run of 1970 when this precious metal managed to hit its highest numbers in the 20th century.
The interest rates during the economic crisis of 1970 rose from 3 percent to 16 percent. During this time, the rate of gold skyrocketed from 50 dollars to 850 dollars. Gold displayed a positive correlation with the rising interest rates.
We can think of a few factors that may have triggered the gold prices to fall in the year 2021:
Other High-Yielding Investments
With the rise in interest rates, it’s only logical that investors turn to other forms of investments like stocks, bonds, and other kinds of fixed-income investments. When a high amount of money starts flowing into other investments, the Federal Reserve is moved to set a higher benchmark for the year. This can make the gold look weaker and lose its value.
Growing Market Competition
Though gold and other kinds of precious metals are smart investments to act as hedge against inflation and fortify a portfolio against losses, it’s a dead asset in your account. This means that the value doesn’t move high or low quickly, which doesn’t drive too many regular profits.
On the other hand, the value of stocks and bonds fluctuate rapidly, often at high percentages every day. They expose the investor to a higher rate of profit or loss in a day as compared to their solid investment counterpart.
As interest rates rise in the market, the buying costs of stocks and bonds rises as well, which results in high yields for investors if they decide to sell their stocks.
Final Verdict
So, according to our experience in the gold market and what we historically know about the performance of gold, we believe that the increase in interest rates will help the value of gold soar in 2022 while stock markets will suffer for new investors.
The rise in interest rate increases the value of dollar, which may push the value of gold to go down, but it’s not a concerning factor to move the gold prices. The general supply & demand with market volatility remain the primary factors that affect the gold prices in the market.
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