Many drivers steer the price of gold. One of them is the temperature of the global economy and the strength of the US dollar. However, when interest rates increase, the price of gold can go up. How does this happen? If you hear news about the recent rate hikes and wonder what might happen with your gold investments, the experts are betting that the rate hikes aren’t bad for gold. Keep reading to learn more about why interest rates are rising, what is happening to gold, and how to invest in gold now to secure your savings.
Why Interest Rates are Rising
Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates, while a decrease in the supply of credit will increase them. An increase in the amount of money made available to borrowers increases the supply of credit. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.
Why Gold Goes Up with Rate Hikes
According to Investopedia, Many investors and market analysts believe that, since rising interest rates make bonds and other fixed-income investments more attractive, money will flow into higher-yielding investments (such as bonds and money market funds) and out of gold when rates move higher. Therefore, when the Federal Reserve raises its benchmark federal funds rate, weakness in gold should follow.
However, also according to Investopedia, while rising interest rates may increase the U.S. dollar, pushing gold prices lower (because gold is denominated in U.S. dollars), factors such as equity prices and volatility coupled with general supply and demand are the real drivers of the price of gold.
What’s Happened in the Past?
Some facts about previous rate hikes and the price of gold, according to Investopedia, include:
- Throughout much of the 1970s, gold prices rose sharply, just as interest rates moved higher.
- The 1980s saw declining interest rates and a bear market in gold.
- Other factors beyond rates—such as the supply and demand dynamics seen in most commodities markets—are likely to have a greater impact on the long-term performance of gold.
What is Happening Now?
According to Visual Capitalist, the previous tightening cycle, which began with Alan Greenspan’s interest rate hike in June of 2004, similarly marked a bottom for gold at $380 an ounce. After, gold’s price rallied by 400% through both rising and falling interest rates, reaching just above $1,900 an ounce in 2011. The upcoming tightening cycle in 2022 is expected to be aggressive, with Goldman Sachs raising their forecasted number of 25 basis point (0.25%) rate hikes this year from five to seven. While gold’s price has chopped around the $1,700–1,900 range for more than the past year, the start of this new tightening cycle could be the catalyst that spurs the next gold bull run.
In a recent article by Forbes, the increase in long-term interest rates has been driven by global economic recovery, which led to an increase in global demand for credit relative to global savings. Added to that is U.S. inflation, which pushes our long-term interest rates up relative to lower-inflation countries. Short-term interest rates will be pushed up by the Federal Reserve, as the Fed announced. They will raise rates in quarter-point increments three or four times this year. They will still be behind the curve, most likely, and will raise short rates more aggressively in 2023.
About Priority Gold
Gold is a strong investment option, whether you are a beginner or seasoned investor. If you are worried about the recent inflation and rate hikes, you can rest assured that your money is going to be safe with gold. History has proven that gold is a great investment and can protect you from economic uncertainty. There is no better time to invest in gold than now, and we can help you achieve your goals.
If you are ready to invest in gold to protect your savings and secure your future, we can help. Priority Gold is one of the most trusted precious metals dealers in the United States with BBB A+ Rating, AAA Rating with Business Consumer Alliance, and 5 Stars Rating with TrustLink.
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