How Do Interest Rates Affect the Price of Gold?
As Gold doesn’t have an inherent interest rate, traders holding the commodity incur opportunity costs when interest rates rise, a factor which favours other asset classes. Opportunity costs describe the loss of alternative investment vehicles once Gold has been chosen. It is important, therefore, to keep a close eye on interest rates and related financial variables to know if Gold is a sound investment.
In simple terms, when interest rates are falling, investors tend to seek out Gold, which boosts demand for the yellow metal and pushes its price upwards. On the other hand, when interest rates are increasing, savings, short-term debts, bonds, and other fixed income investments become more attractive, because they are now more profitable. As a result, investors are discouraged from holding Gold, which depresses demand and forces its price downwards.
Of course, this negative correlation between interest rates and gold isn’t always linear, as sometimes interest rates go up, while the Gold price remains flat, or even rises, often due to higher industrial demand, or because a natural disaster has occurred.
The positive correlation between US interest rates and the US dollar is also important to consider when trading Gold. When interest rates increase in the US, the greenback tends to become a more attractive currency for foreign traders who are looking for more investment opportunities to be completed in USD. Hence, demand for the dollar increases, which pushes its price upwards. Like most commodities, Gold is priced in USD, which means that any upward or downward movement will affect demand, as Gold becomes either more or less expensive for foreign buyers. Therefore, Gold and the US Dollar usually have a negative correlation, and tend to evolve in opposite directions.
Of course, interest rates are not the only factor to take into account when trading Gold, since, like most assets, its price is principally determined by supply and demand. Gold is one of the most popular assets for traders who use global commodity trading brokers, especially during periods of economic uncertainty, geopolitical instability, social unrest, and high market volatility. It is universally considered a safe haven asset, making it the first port of call when riskier, higher-yield investment vehicles become less attractive. The UFX platform, which provides some of the best trading conditions in the online industry, is the choice of smart investors who understand the fundamentals of the Gold market and want to apply the world’s best trading tools to trading this ever-alluring asset.
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