There are many reasons why gold price and silver fluctuate. We have previously discussed the kinds of things that drive up silver price. However, what about gold? More specifically, what kind of interest rate environment is responsible for the rise in gold prices?

When interest rates rise, does gold rise? Are other micro- and macro-forces at play, or is there a cause-and-effect relationship? How might we try and tell? If you ask around, the most common response to the question "does gold go up when interest rates rise?" is "no." However, these common responses are frequently deceptive.

When interest rates rise, when does gold rise?

According to logic and common sense, people buy gold in bad times. A buffer against a falling dollar is something that most people would want.
For instance, gold bullion bars are frequently purchased as a hedge against assets that exhibit poor performance during economic downturns. Interest rates are frequently held low during these downturns by fiscal and monetary policies. For instance, cheap credit was made possible by low interest rates, which contributed to the United States recovery from the severe recession of 2008.

Due to the fact that gold's value is independent of economic activity, its value only becomes apparent in a declining economy. Simply put, it is money. Stocks, cash, property, and other assets valued in dollars naturally lose value.

Gold's value has historically skyrocketed as a result of investors flocking to it during economic turmoil. Analyzing this situation rationally reveals a problem: The opportunity cost of holding gold increases when interest rates rise.
To put it another way, your money will grow elsewhere. So, what can be done? When the interest rate goes up, you might, like many others, move away from gold and back into these assets.

After all, rising interest rates are a sign that the economy is getting better. People assert that shares pay higher dividends, savings accounts pay higher interest rates, property values will rise more quickly, and so on. However, that is only part of the picture. Investors who are savvy are aware that, just like in many developing nations, high-interest rates only imply higher risk profiles.

Is there therefore less motivation to hold gold? This could not be further from the truth; after all, it pays no interest at a time when other assets are offering substantial rewards. In point of fact, concerns about economic instability and currency volatility frequently prompt the market to respond by raising interest rates.
What happens to the price of gold when interest rates go up?

According to studies of the economy, there isn't much of a clear link between the price of gold and increases in interest rates. There are some in-depth studies that show gold prices are actually rising, but it's hard to say for sure. According to Goldmoney's research, gold prices rise by 4.85% when interest rates rise. This contrasts with 4.0% during periods of interest rate reduction.

The price of gold increased following the last four Fed rate hikes, according to an HSBC study. Still, take this with a grain of salt adjusted for time. It could be evidence of a longer-term increase in gold's price as a result of other factors, like a weaker dollar. Is there a better source now that you have disproven the conventional wisdom regarding interest rate hikes and gold price increases? Check history out.

What actually affects the value of gold?
Gold prices are thought to fluctuate solely in response to economic ups and downs. Precious metals have a long history of being economically countercyclical. However, interest rates should not be the primary metric used to evaluate the economy or precious metals. It's important to look deeper than just the numbers. What would happen, for instance, if interest rates remained lower than inflation for an extended amount of time?

Keeping cash in a savings account would still be a losing strategy given this common occurrence, whereas holding onto gold would be appealing. Gold improves when genuine financing costs are negative. But keep in mind that the price of gold remained relatively stable in 2017 and that banks were paying negative interest rates. What may appear odd at first actually reflects market opportunities.
So, whether you want to buy cheap one-ounce gold coins or a Comex Futures contract, history teaches us to look at the fundamentals. There is less reason to hedge against traditional assets when a government pays an interest rate that beats inflation but doesn't let this cloud your view of the bigger picture. There are numerous additional considerations.

Even though gold does not earn interest, a strong economy still allows for capital gains. It is supported by the data. As a result of rate hikes being negative for stocks, demand for gold may rise. Industrial buyers' demand for precious metals would likely also rise as the economy expanded. Even though the demand for gold buyers is just as important as the supply, the overall price will still be affected.
Is it a good time to buy gold if interest rates rise at the same time?

Although it may appear odd at first, the phenomenon of rising gold prices amid rising interest rates may very well have occurred during a typical depression. Is one on the horizon? During Donald Trump's first year in office, the economy significantly improved and does not appear to be headed for disaster. However, many investors have continued to hold gold as part of their diverse portfolios despite the possibility of rate increases. Even though gold and silver prices fluctuate on a daily basis and some investors may be focused on the short term, long-term plays always yield greater wisdom.

If you're in it for the long haul, gold has consistently risen more or less in line with inflation over the very long term. As a result, you shouldn't be too concerned about it. And that is what we ought to anticipate. It is impossible to predict the future of metal markets, but the more you know about everything that affects gold prices, the better off you will be.