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 澳洲幸运5官方开奖结果体彩网:federal funds rate, weakness in gold should follow.

However, there’s little eviden🔴ce that gold is consistently weakened by federal funds rate hikes or Treasury yields. Despite some negative correlation in the 2000s, there are far too many instances of gold and interest rates rising together to say that high interest rat♛es cause gold prices to fall.

Ultimately, the relationship between gold prices and interest rates is uncertain and unstable because gold is traded on a global market subject to forces far beyond the reach of the 澳洲幸运5官方开奖结果体彩网:Federal Reserve.

Historical Look at Gold Prices and Interest Ra🅠tes

Even though the widespread popular belief is that a strong 澳洲幸运5官方开奖结果体彩网:negative correlation exists between 澳洲幸运5官方开奖结果体彩网:interest rates and the price of gold, a long-term review of the respective paths and trends of interest rates and gold prices reveals that no such relationship exists. The correlation between interest rates and the price of gold over the past half-century, since 1970, has only been about 28% and is not considered significant.

A study of the massive 澳洲幸运5官方开奖结果体彩网:bull market in gold that occurred during the 1970s reveals that gold’s run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising. Short-term interest rates, as reflected by one-year 澳洲幸运5官方开奖结果体彩网:Treasury bills (T-bills), bottomed out at 3.5% in 1971. By 1981, that same interest rate had more than quadrupled, rising as high as 16%. In that same period, the price of gold mushroomed from less than $200 an ounce to a previously unimaginable price of nearly $2,000 an ounce. Gold prices had a strong 澳洲幸运5官方开奖结果体彩网:positive correlation with i♍nterest rates,ꦏ rising in concert with them.

The Fed began its latest rate-hiking cycle in March 2022, just after Russia’s invasion of Ukraine had threatened global stability and sent gold prices soaring. As the Fed committed itself to a sustained program of rate increases to bring down 澳洲幸运5官方开奖结果体彩网:inflation, gold prices did in fact tumble. From highs near $2,000 per ounce in March, gold prices entered a volatile 澳洲幸运5官方开奖结果体彩网:downtrend for much of 2022 until hitting a 澳洲幸运5官方开奖结果体彩网:triple bottom around $1,630 over the fall months. While the historical correlation remains questionable, it is likely that investors being lured by higher rates o♊n fixed-income investment💫s contributed to the decline in gold prices over 2022.

Moving into 2023, gold prices began to recover, reaching the level of $1,900 per ounce in mid-January alongside signs of moderating inflation and expectations for a slowdown in Fed rate hikes. Investors may🔴 be returning to gold partly in response to the prospect of lower interest rates. However, it is important to remember that monetary policy is just one of many factors that influence gold price movements.

What Drives Gold Prices?

The price of gold is ultimately not a function of interest rates. Like most basic commodities, it is a function of 澳洲幸运5官方开奖结果体彩网:supply and demand in the long run. While surges in supply can cause the 澳洲幸运5官方开奖结果体彩网:price of gold to plummet, demand is ultimately the stronger component between the two. The level of gold supply only changes slowly, since it takes 10 years or more for a discovered gold deposit to be converted into a producing mine. Ri🙈sing and hi꧟gher interest rates may be bullish for gold prices, simply because they are typically bearish for stocks.

It is the 澳洲幸运5官方开奖结果体彩网:stock market rather than the gold market that typically suffers the largest outflow of investment capital when rising interest rates make fixed-income investments more attractive. Rising interest rates nearly always lead investors to rebalance their investment 澳洲幸运5官方开奖结果体彩网:portfolios m♒ore in favor of bonds an💧d less in favor of stocks.

Higher 澳洲幸运5官方开奖结果体彩网:bond yields also tend to make investors less willing to buy into stocks that may have high multiples or valuations. Higher interest rates mean increased financing expenses for companies, an expense that usually has a direct negative impact on 澳洲幸运5官方开奖结果体彩网:net profit margins. That fact only makes it more likely that rising rates will result i🎀n lower stock priဣces.

When stock indexes reach new highs, they are susceptible to downside corrections. Whenever the stock market declines significantly, one of the first alternative investments that investors consider transferring money into is gold. For example, gold prices increased by more than 60% during 1973 and 1974, at a time when interest rates were rising, and the S&P 500 Index dropped by more than 20%.

The Bottom Line

Given the historical tendencies of the actual reactions of stock 澳洲幸运5官方开奖结果体彩网:market prices and gold prices to interest rate increases, the likelihood is greater that stock prices will be negatively impacted by rising interest rates and that gold may benefit as an 澳洲幸运5官方开奖结果体彩网:alternative investment to equities.

So, 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 澳洲幸运5官方开奖结果体彩网:volatility coupled with generꦛal supply✤ and demand are the real drivers of the price of gold.