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Gold price and interest rate relationship

Gold and interest rates traditionally have a negative correlation in the relationship between the two. It is not guaranteed but usually the gold price goes up when interest rates go down, and down when rates go up. This is because rising interest rates make stocks, government bonds and other investments more attractive to investors. Lower interest rates make these alternative assets less appealing; driving investors towards gold, and increasing demand and the price accordingly. Gold is seen as a store of wealth for times of financial difficulty for this reason.

Gold and Interest Rate Relationship

What happens when interest rates rise?

Growing economic confidence means that consumers and expanding businesses, with greater disposable income, tend to borrow more. In this situation, interest rates often rise. Central banks or financial institutions can expect greater returns from their loan(s) when the cost of borrowing increases.

In such prosperous times, the attraction of a safe haven investment diminishes and, with interest rates also bolstering the domestic currency, the short-term gold price should go down. Interest rate rises are also sometimes used as a means to combat rising inflation. If prices are rising quickly central banks increase interest rates to encourage people to save their money and reduce spending, hopefully stopping inflation from become problematic.

What happens when rates fall?

Rates fall or remain at base rate (0%) as economic confidence pales and growth stagnates. This economic slowdown usually hits things such as living costs, wage growth, and employment itself, as well as devaluing the nation's currency. In these times investors turn to 'safe haven' gold to protect their wealth and the gold price, based on trade in gold futures, will rise.

As gold doesn't produce an annual yield, a low interest rate means other investments also don't make any additional annual income, further improving the appeal for gold.

Fed rate hike effect on gold?

Interest rates are different for every nation, with varying impacts upon their economies and the price of gold in those countries. Rates in the US have a greater influence than most and because gold is predominantly traded in US Dollars, its interest rates have a particular impact on the gold price. It follows that when the US Federal Reserve (also referred to as the Fed) hike interest rates, this can have a profound effect on the gold price. A hike will usually see gold prices drop, while a decrease helps keep gold high.

You can track the exact real time gold prices in Pound Sterling, US Dollars and Euros on the BullionByPost website.