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How Interest Rates Affect the Gold Market

For savers and investors alike, current interest rates are a pervasive entity. They hold significant sway over the fiscal power of your monetary asset...

29 July 2022

Banc Content

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For savers and investors alike, current interest rates are a pervasive entity. They hold significant sway over the fiscal power of your monetary assets and can make it more or less difficult to procure new stocks, shares and commodities depending on the overall economic outlook.

But what about gold? Is the precious metal as easily affected by fluctuating interest rates as higher-yielding investments, like stocks and shares? And how exactly do interest rates affect the gold market?

Well, there’s no simple answer. Gold is unique in that its value is affected by all kinds of global economic factors, so the impact that interest rates have isn’t black and white.

In this post, we’ll discuss how interest rates affect the value of gold and debunk some of the common misconceptions surrounding the relationship between the gold market and the Federal Reserve Board. Use the links below to navigate or read on for the full guide.

How Does Gold React to Interest Rates?

Previously it was believed that rising interest rates meant that a weakness in gold should follow. And this makes sense when you consider that rising interest rates mean that higher-yield investments typically perform better, increasing demand for stocks, shares and bonds and lowering it for safer, lower-yield assets – such as gold and commodities.

If only it were that simple, however. Because while this theory makes sense on paper, there’s little evidence from recent gold market data to suggest that there’s any negative correlation between gold and rising interest rates. So, what’s going on?

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To understand the relationship between gold and interest rates, you need to consider what other factors affect the price of gold. From demand and supply to geopolitical crises and disruptive world events, the gold market is influenced by a variety of external pressures, meaning that any change in the Fed’s funds rate has only a limited impact on gold’s value.

So, when interest rates are rising, there’s no need to panic and follow the crowd by abandoning your gold assets. In fact, with interest rates having so little negative effect on the gold market, it can be a safe, reliable, and predictable place to move your money – particularly for risk-averse people who value monetary stability over gains in yield.

When Interest Rates Rise, Does Gold Increase?

If you were to look at gold prices over the past 50 years, you’d note several instances in which its value spiked in line with rising inflation. Indeed, during the gold “bull market” of the 1970s, gold prices hit an all-time high roughly at the same time as inflation was rising rapidly – raising questions about the potential for a positive correlation between gold value and the interest rate.

Confused? Again, extra context is needed. Because while there were certainly signs that the gold market was moving in line with interest rates throughout the 1970s, any positive correlation was only temporary, and more to do with the global demand for gold during this period. This was confirmed in the 1980s, a decade which sustained a bull market for gold while interest rates were in steady decline.

So, in answer to the question, there’s little evidence to suggest that rising interest rates equate to an increased gold value – save for some historical coincidences in the 1970s. As outlined earlier, gold is much more likely to be affected by other market conditions than fluctuating interest rates, so we wouldn’t recommend using the federal funds rate as a barometer for your gold-buying decision.

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When is the Right Time to Buy Gold?

Are you hoping to diversify your financial portfolio by buying gold? Then you’ll need to know a little about the best times to buy.

As touched on earlier in the guide, gold prices are affected by several factors, making knowing the best time to invest tricky. Remember, though, that unlike other assets gold isn’t nearly as volatile, so you can afford to be less choosy about the best time to buy.

When buying gold, historical value data is the most helpful gauge against which to judge your decision. By understanding when the price of gold rose and fell in the past – and what factors influenced this – you’ll be well placed to make an informed decision on the best time to buy.

If you want to buy gold while enjoying the fluidity of cash assets, Glint is the perfect choice. Our proprietary gold-buying platform allows you to buy physical, allocated gold and use it like regular money, so you can enjoy the best of both worlds. Learn more about how Glint works right here.

 

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline. 

To learn more, visit our homepage or give us a call at +44(0)203 915 8111.

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