The relationship between interest rate changes and gold prices

Those familiar with the gold market know that negative interest rates have often had a positive impact on gold prices in the past. This article explores the relationship between the interest rates maintained by the U.S. Federal Reserve and gold prices in greater detail.
 

The connection between gold prices and falling interest rates

In March 2020, the Federal Reserve announced it would lower the interest rate from 1% to between 0% and 0.2% to stimulate the U.S. economy. This rate, set by the Fed, is used by banks when lending money to each other. The impact of this low interest rate trickles down to the rates applied to credit card spending, savings accounts, and mortgages.
 
When an economy experiences such low interest rates, many investors become interested in buying gold as a "safe haven." Low interest rates often indicate uncertainty about economic growth. Additionally, they can lead to inflation, making gold an effective "inflation hedge." As a result, an announcement by the Federal Reserve to lower interest rates often leads to an increase in gold prices.
 

How does the interest rate on government bonds relate to the gold price?

There is also a relationship between government bond yields and the gold price. When the Federal Reserve announced in March 2020 that it would lower interest rates, bond yields fell to a record low. This occurs because bond prices rise when interest rates drop. Investors, receiving little interest on their savings, prefer to buy bonds. For the same reason, other investors choose gold over bonds.
Owning gold instead of government bonds offers the advantage that the value of gold is not influenced by government policies. Additionally, gold is traded globally and its trade is not restricted by international borders.
Interested in purchasing gold as a "safe haven" or "inflation hedge"? Explore our selection here.
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be considered as such. Past performance is no guarantee of future results.