How do Interest Rates Affect the Price of Gold and Silver?

It has long been a widespread belief that interest rates have a significant impact on the prices of gold and silver.  On the face of it, this would appear to be true. If interest rates were to rise, then it would make sense that the appeal of bonds and savings accounts should go up and demand for physical assets go down. In reality, however, there is no real statistical evidence to support this. This is because there are many other factors that drive the prices of gold and silver.

Correlation between interest rates and prices of gold/silver

Whilst there is some level of correlation between interest rates and the prices of gold and silver, it is not enough to say for definite whether rising interest rates have a positive or negative effect. Over the last 50 years, the correlation between interest rates and the price of gold has only been at around 28%.

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Rising interest rates have also been shown to have a bullish effect on PHYS01_Animated_Gif_2_MPUprecious metals in recent times, a complete contradiction to what precious metals experts have been telling us for years. Last year, for example, the prices of gold and silver rallied significantly after the federal reserve announced an increase in interest rates. One of the reasons for this is that gold and silver markets predominantly operate on investors’ expectations for the future.

If investors foresee that interest rates might rise, then the prices of gold and silver may drop a long time before the changes in interest rates are actually introduced. After interest rates have risen there may actually be a bounce in gold and silver prices as investors look to hedge their bets for the future. According to recent statistics, the chance of gold prices being higher 12 months after a Fed hike is 61%.

That’s not all

Precious metals are also purchased by many investors as a hedge against inflation. They, therefore, make quite timely investments when purchased during the course of a rate-hike cycle. Hyper-inflation in countries like Venezuela is likely to drive citizens of the country to invest their cash savings in commodities that will hold their value like gold and silver. This serves as a warning to everyone to keep an eye on the direction of inflation in their own countries as what appears to be relatively stable conditions can change quickly if confidence turns.

How do interest rates affect the price of gold
Gold and silver ten oz. bullion bars

Other factors influencing gold and silver prices

The main reason that interest rates do not tend to have a significant impact on the price of precious metals, is that there are many other factors normally involved. Investors buy gold and silver for all sorts of different reasons. They may invest in precious metals as a response to potential economic and geopolitical risks for example. After Brexit demand for gold and silver went through the roof as people were worried about the country’s economic future and how potential trade links with the rest of Europe would be affected. This uncertainty meant that people didn’t trust the markets as much as they would have normally and so investing in physical assets represented a viable alternative as well as a way to protect their wealth in the event of a market crash. Other geopolitical factors such as Trump’s administration in the US have also had an effect on gold and silver prices.

Learn more in our YouTube video – “The Gold price today & investing in gold medium to long term”

Another factor that has a big influence on gold and silver prices is the performance of the stock market. If the stock market is underperforming or has declined significantly then one of the first investments people tend to turn to is silver or gold.

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Silver prices

Silver has a wide variety of industrial uses which means its price isn’t always affected by the same factors that influence gold.  Due to its heavy industrial use, silver prices can also be influenced by a wide range of other economic forces, depending on how other markets are performing.

Purchase gold or silver through Physical Gold

Physical Gold are specialist dealers in gold and silver. We offer a wide range of investments suitable for all investors including silver bars and gold bars and CGT tax-exempt bullion coins (silver and gold). For more information on our services and how we can help you, please give us a call on 020 7060 9992.

Image Sources: Digital Money World

5 replies on “How do Interest Rates Affect the Price of Gold and Silver?”

Great piece! Thanks for writing. The relationship between Silver and the world’s financial systems is so complicated, there is so many moving parts. Silver is still so underpriced. Futures are being oversold. Who knows where the price will end up. Definitely a great long term investment.

It was interesting when you explained how investors can affect the price of precious metals. My sister mentioned she wants to find a buyer for her antique gold jewelry since she and her husband need extra money for their household bills this month. I’ll share this info in case she’s interested in researching the current price of gold before selling.

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