Do gold prices increase or decrease with interest rates? Interest rates can affect gold prices, but the answer to this question is not straightforward. Investors often flock to gold when there’s a hint that precarious economic times are on the horizon, and a wise gold investor can benefit from market trends.
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When Do Interest Rates Change?
The Federal Reserve sets interest rates eight times a year. The rate-setting committee can also set emergency rate cuts in response to economic events to prevent a recession. Interest rate changes are among the events that cause gold prices to fluctuate, and cause investors to gain or lose confidence in the market.
When investor confidence lags, the price of gold typically rises, often for the short term and sometimes for several weeks. We do not recommend trying to time the market when you buy or sell gold. But it’s best to have an understanding of how rates can affect the value of precious metals.
Interest Rates, the Dollar and Gold
When Federal fund rates increase, investors tend to buy U.S. stocks and other securities. When the prices of these assets rise, it drives the exchange rate up for the dollar. When the value of the dollar increases compared to other world currencies, the price of gold usually drops.
Conversely, a drop in interest rates can drive gold prices up. However, the way any investment responds to stock market conditions is, to some degree, based on market psychology. Investors can react quickly to positive or negative economic news. Given the 24-hour real-time news cycle, they can overreact as well.
| 2001 | Interest rates down – Gold prices increase |
| 2002 | Rates drop in November – Gold increases |
| 2003 – 2004 | Rates steady – Gold prices up |
| 2005 – 2006 | Rates and gold rise, then gold drops with increased rates |
| 2007 – 2008 | Interest rates fall – Gold prices rise |
| 2009 – 2016 | Interest rates fall to around 0% – Gold peaks and later falls |
| 2017 – 2018 | Interest rise as much as 2 points – Gold prices decrease |
| 2019 – 2020 | Rates hold steady then rise – Gold prices increase |
2001 through 2019
Historical Gold Prices and Interest Rates
The value of the dollar was attached to the price of gold until March 1973, when Congress eliminated the gold standard. At this time, the relationship between gold, interest rates and the value of the dollar became more subtle. However, when people feel the economy is threatened, they still flock to gold as a safe haven.
Historical interest rates and gold market prices show us that there’s a negative correlation between the two. When rates increase or decrease, gold prices go in the other direction. However, this inverse relationship is not guaranteed and may be short lived.
- September 2001: The Fed reduced interest rates to as low as 1.19% due to concerns about an economic slowdown after the 9/11 terrorist attacks. Gold prices rose from $271.50 to $293.10 per ounce.
- 2002: Interest rates average around 1.8% until dropping to around 1.4% in November and for the rest of the year. Gold prices start the year at $277 then fluctuate, rising as high as $327 until November. Gold increased when the rates dropped in November, reaching a high of $349.30 late in December.
- 2003 through 2004: Interest rates remained steadily low while the price of gold increased to a high of $452.85 per ounce.
- 2005: The Federal Reserve started raising interest rates as the U.S. economy grew strong. The higher interest rates didn’t stop the climbing price of gold, which ranged from $421 in January to $525.50 in December.
- Mid-2006: Interest rates increased, and the price of gold dropped temporarily. For the rest of the year, gold prices rose and fell in line with interest rates instead of opposite of rates.
- 2007 and 2008: Gold fluctuates a bit as interest rates remain around 5%. Rates start to drop late in 2007, and gold prices rise. Rates continue to fall through most of 2008, and gold prices rise to a high of $1,011.25 at one point.
- 2009 through 2016: Rates hovered around 0% as the Fed tried to create a recovery from the Great Recession. Gold prices took off, peaking at nearly $2,000 per ounce, then began to drop in 2013.
- 2017 and 2018: Interest rates rose to the 1.3% to 2.27% range, and gold prices dropped a bit, ranging from $1,157 to $1,325 per ounce.
- 2019: Interest rates were around 2.4%, while gold steadily rose to $1,511 per ounce. Rates fell at the end of the year into early 2020, and gold took off with a value of up to around $1,600 per ounce.
Is Gold Still a Hedge Against Inflation?
Given that there is no direct correlation between the price of gold and interest rates, is gold a hedge against inflation?
The World Gold Council points out that gold is highly liquid and carries no credit risks. The precious metal is in demand for jewelry and other luxury items, an investment, used in industrial applications and as an asset held in reserve. Gold retains value over time and is still an excellent hedge against inflation.
The year-to-year data above tells us that gold acts as a hedge if you hold the investment for the long term. Investing in a Gold IRA is an excellent way to accomplish this investment strategy. While interest rates can have a short-term influence on gold prices, this largely depends on the economic outlook.
The Bottom Line on How Interest Rates Affect Gold Prices
The price of gold can rise and fall rapidly depending on Federal Reserve interest rate announcements. However, the correlation is not direct, often depending on the overall economic situation at the time.
Given the long-term growth that usually accompanies gold, dollar-cost averaging over time can help you create an effective hedge in your portfolio without trying to time the market. There are also several other ways to invest in gold if you are uncomfortable with buying physical precious metals.