Gold has always been viewed as a hedging instrument against economic uncertainty, inflation, as well as currency devaluation. One important factor that impacts gold prices is interest rates, but how exactly do they correlate? If you’re thinking about investing in gold, being aware of this relationship can lead to better investment decisions.

Interest Rates and Their Impact on Gold Prices

Gold, unlike stocks or bonds, doesn’t pay interest or dividends. This means that — when interest rates are high — investors may instead invest in yield-bearing assets like bonds, or even savings accounts. In contrast, when rates are low, gold is more appealing, as opportunity cost of holding gold falls.

Here’s a breakdown of the usual relationship:

• Higher-Interest Rates → Gold prices go down as investors gravitate towards higher-yielding bonds.
• Interest Rates Declining → The prices of gold tend to increase because non-yielding possessions such as precious metal become more desirable.

But it’s not always a linear relationship — inflation, market sentiment, and global uncertainty also figure in the equation.

Historical Trends: Interest Rates and Gold Prices

Here are a few pivotal historical events when interest rates and gold prices diverged:

• The 1970s Stagflation: Inflation peaked, while interest rates climbed even higher, and prices of gold surged as investors looked for a hedge against economic uncertainty.
• Early 1980s: The Federal Reserve hiked interest rates to bring down inflation, triggering a fall in gold prices.
•  2008 Financial Crisis: Fed cut rates to near-zero, which saw a historic rise of gold prices.
• After COVID (2020-2023): Besides continuing the trajectory, low interest rates and inflation fears drove gold prices to record highs, squeezing gold when the Fed began to hike in 2022, and recovering once again in 2023.

The Fed is stuck between a rock and a hard place, and so is inflation, interest rates, and gold.

Soaring interest rates can be an economic headwind on gold, but inflation adds a new wrinkle. When inflation outpaces the growth of interest rates, real rates (post-inflation) stay low or even negative. Which makes gold an attractive store of value.

In other words, currently inflation is 5% and interest rates are at 3%, which means real rates are negative (-2%) — historically that is a support for the price of gold.

Is It a Good Time to Buy Gold Now?

Central banks across the globe are raising and lowering interest rates to combat inflation and filter through economic slowdowns, loggers are watching gold closely. And if rates peak, or retreat, gold could gain momentum. Gold can still remain a long-term hedge against economic uncertainty even with rates this high.

Final Thoughts

It can be complicated at times trying to make sense of the connection between interest rates and gold, but history does a great job of showing us how valuable gold is when uncertainty is all around us. AU Bullion has you covered with the best prices on gold and other bullion so you can buy with confidence whether you are a veteran of the field or a new participant.

Looking to buy gold? Learn more about AU Bullion’s newest products and protect your wealth now!