Gold price with rising interest rates

Investment gold bar of the Austrian Mint / Image credit: Own work

In the fight against high inflation rates, central banks around the world are currently raising key interest rates. Last year, the FED, the ECB and other central banks reversed the interest rate trend, ending a period of low interest rates that had lasted for more than a decade.

But what does that mean for gold? How will the gold price develop in an environment of rising interest rates?

Interest rates at levels seen before the 2008 financial crisis

At the beginning of February, the U.S. Fed raised its interest rate to 4.75%, in the euro zone the ECB raised its key rate by half a percentage point to 3%, and the Bank of England pushed it up to 4%.

The FED raised the key interest rate again - Image credit: Public Domain

Central banks have to walk a fine line when it comes to key interest rates. Higher interest rates are necessary to keep inflation under control; if the interest rate becomes too high, the economy risks plunging into recession.

And high inflation rates coupled with a weakening economy would mean a dangerous cocktail and plunge us into stagflation.

However, since inflation is now falling, at least in the U.S., experts expect that the FED's maximum interest rate should also be reached soon. With the increase of only 0.25 percentage points, Fed chief Powell has already taken his foot off the gas. The markets are now even hoping for a temporary pause in interest rates from May.

However, inflation rates in the EU are currently still well above the ECB's target. It can therefore be assumed that the ECB will continue to raise interest rates in the coming months.

While banks are quick to pass on the interest rate increase in the lending business to customers, they are still conspicuously holding back on savings interest rates. At the moment, investors are benefiting from the higher interest rates primarily with bonds and the like.

How gold price and interest rates are related

Gold prices and interest rates usually behave in opposite directions. This means that when interest rates rise, it is likely that the gold price will fall. This correlation between gold price and interest rate development is explained by the opportunity cost theory. This states that when interest rates rise, investors tend to invest in safe, but interest-bearing investments instead of buying gold, which does not pay interest.

So, since even security-conscious investors can make ongoing profits through interest rates without much risk, the demand for gold on the world market would fall and thus depress the price. In fact, the price of gold gave way in the short term after the interest rate meetings and set back to below 1900 dollars / ounce.

While the interest rate environment has a significant impact on the gold price development, there are several other factors that influence the gold price. These include inflation, the relationship between the dollar and the euro, and geopolitical developments.

Should you still buy gold despite rising interest rates?

Yes, at least part of one's assets should be invested in gold. A low gold price should not discourage the purchase of investment gold, but rather be seen as an opportunity to get into the precious metal at a low price.

As someone who holds gold as an investment, you should not panic in the face of a falling price and sell your own gold. Because unlike the stock market, where stop-loss instructions with the aim of avoiding further losses can be useful, precious metals should never be sold out of fear of falling prices. Because while stocks can actually fall to zero, a total loss is impossible with gold! Gold has never been worthless in history. Sooner or later, the gold price will rise again.

Therefore, a precious metal investment must in any case be seen as a long-term investment, the main purpose of which is to hedge one's assets against inflation and loss of value. Gold and silver are not suitable as short-term speculative objects.

We always recommend our customers to hedge a certain portion of their savings with gold, silver or other precious metals. A general guideline is that between 10-20% of the assets are ideal as a gold investment.

If you want to buy precious metals as a security or for long-term asset accumulation, we advise you to buy smaller amounts of gold at regular intervals. With this strategy, fluctuations in the gold price can be optimally balanced out.

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