The U.S. Federal Reserve has announced its first interest rate hike since 2018. What could this mean for the gold price? Here’s what you need to know. 

How Interest Rate Hikes Affect the Gold Price

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The Fed has finally kicked off its fight against runaway inflation by 

announcing its first interest rate hike since 2018 on March 16

As a precious metals investor, you might be wondering how rising interest rates will affect the price of gold, and we’re here to give you the answer.

How rising interest rates have historically affected the gold price

But before we get into that, here’s a brief recap of the Fed’s latest rate hike decision (

How much will the Fed raise interest rates in 2022? 

The Fed has kept interest rates near zero since the start of the COVID-19 pandemic. But with prices for everything from food to cars skyrocketing, the U.S. central bank raised its benchmark rate by a quarter percentage point, bringing it into the 0.25%-0.5% range.

Moreover, Fed Chair Jerome Powell, who has finally admitted that inflation is 

, said the Fed is prepared to raise rates even more aggressively, if necessary, to tamp down rising consumer prices.

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well,” 

When we talk about the Fed’s interest rate (or the European Central Bank’s for that matter), we mean the interest rate at which the nation's 

central bank lends money to domestic banks

, often in the form of short-term loans. 

 central banks can affect economic activity:

if they’re looking to expand the economy they can decrease the cost of funds for borrowers by lowering interest rates. 

and on the contrary, if they need to rein in the economy because inflation is higher than desired, they can increase the cost of funds for borrowers by raising interest rates.

In general, rate hikes mean that it might become more expensive for both businesses and consumers to take out a loan, which can, in turn, discourage spending and reduce the supply of money in circulation.

the effect of interest rate hikes on consumers represented by a picture of a cartoon man tugging on a cart with a car, a house, and a credit card

And what could interest rate hikes mean for the wider U.S. economy? 

Well, some economists even predict that the U.S. economy might fall into a recession this year, partly because the Fed might go too far in raising interest rates to fight inflation.

In Europe, the ECB is keeping interest rates unchanged, at least for now, despite inflation in Europe rising at its fastest pace since 2008.

How higher interest rates can help fight inflation? 

make it more difficult for individuals and businesses to borrow

Not only this restrained spending is supposed to help keep rising consumer goods prices in check, but it will also most likely affect prices for some investment assets, like stocks, cryptocurrency, and precious metals.

What impact will interest rate hikes have on the gold price?

There’s a general view that central bank rate increases are the 

According to this line of argument, higher rates are supposed to diminish the 

, which then in turn should lead to a lower gold price. 

This point of view, however, is often criticized by some economists as too simplistic and inconsistent with gold’s historical performance:

a special historic relationship with interest rates

shows how gold, the U.S. dollar, and U.S. stocks performed when interest rates increased between 1994 and 2015:

The chart shows how gold, the U.S. dollar, and stocks performed during interest rate hikes between 1994 and 2015.

As you can see, gold usually underperforms U.S. stocks and the dollar 

However, the price of gold tends to recover and, in some cases, even 

there was no big gold rally over the past year 

as the precious metal’s price hovered between $1,700 and $1,900.

the price of gold rising represented in a picture of two gold ingots lying on a white paper with graphs

investors actually seemed to believe the Fed’s long-time 

, right until Powell admitted inflation was a real threat. 

 held the attention of many investors, distracting them from multiple short-term gold rallies throughout the year.

, joining the rush of buying high-flying stocks like Apple and Tesla. 

Russia’s invasion of Ukraine on February 24 which increased the demand for safe-haven assets

Now, looking at the performance of the gold price after multiple interest rate hikes in the past, it seems like gold’s bull run may well continue in the future. 🐂

A look at the strong changes in demand in the gold sector y-o-y.

A Shift in Gold Demand Trends

Good thing central banks can't print gold. 😉

21.9% Annual Inflation... and Counting

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