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At the price of gold has broken record after record since the beginning of 2024, and those who invested in the precious metal at the beginning of this year or before now will make a profit. In addition to the meteoric climb, the price of gold recently rising over $2,700 per ounce – a new high for precious metals – which caught the attention of even more investors.
Economic uncertainty, global tensions and changes in the value of the US dollar have led many to buy gold as an alternative asset. In the midst of this market situation, the Federal Reserve is alone reduce interest rates for the first time in four years, with more cuts expected later this year and into 2025. This change in monetary policy could further boost the attractiveness of gold.
But how do interest rates affect the price of gold? Here’s what experts say about the impact of the environment on the price of this precious metal.
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Here’s how interest rates affect the price of gold
When interest rates fall, gold often becomes more attractive to investors. Steven Conners, founder and president of Conners Wealth Management, explains why: “As returns on risk-free assets decline, gold prices (often benefit),” said Conners.
In other words, while traditional safe investments offer lower returns due to falling interest rates, gold shines brightly by comparison.
Steven Kibbel, a certified financial planner and senior editor at InternationalMoneyTransfer.com, echoes this sentiment. “Rate cuts generally push gold prices higher as investors look for safe-haven assets when interest rates are low,” Kibbel said.
Kibbel says he’s seen clients move money from bonds to gold during that time, finding stable price shop.
History also supports this trend.
“From 1966 to 2020, the gold price index advanced 8.37% annually when the Fed lowered interest rates … compared to 5.53% when it raised interest rates,” said Robert R. Johnson, chairman and CEO of Economic Index Associates.
This suggests that falling rates could be a “tailwind” for gold prices.
However, the effect of interest rates on gold is not always direct. Conners reminds us to consider the unique factors in today’s market. “Geopolitical concerns (have) had more of an impact (lately),” he said.
Ongoing conflicts around the world have a significant impact on the value of gold, sometimes affecting interest rates as well. Conners points out that when there is major geopolitical tension, as we are experiencing today, gold often becomes fence for uncertainty that comes with the global crisis.
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Will current rates affect your gold investment decision?
When the interest rate influence the price of goldit should not be the sole factor in your investment decision. Johnson recommends focusing on your personal financial goals.
When considering gold investments, “(let) your time horizon and risk tolerance (guide you),” Johnson advises.
If your goal is to build long-term wealth, gold is not the only solid investment option. In fact, “the long-term yield (on gold) is lower than (what you get from) the equity market,” Johnson said.
For example, from 1925 to 2023, gold returned 4.81% annually, while the S&P 500 returned 10.3%. So, while gold may provide short-term stability, it may not match the growth potential of other types of investments over many years.
With these historical trends, savvy investors may view gold as one of the larger investment strategies. By combining gold with other assets that have different risk and return profiles, you can creating a more resilient portfolio which balances stability and growth potential.
Bottom line
Interest rates affect the performance of gold, but they are not the only factors that guide your investment choices. While the recent rate cuts may increase gold’s appeal, you should consider a broader financial strategy. Kibbel recommends a moderate approach, recommending up to 10% gold allocation for most portfolios.
Remember that, unlike stocks and bonds, gold does not generate income. If you are considering investing in gold in the current market, start with a small position and increase gradually as you see fit. Most importantly, consult a financial advisor who can help you understand the role of gold in a diversified portfolio.
