How Slower Fed Rate Hikes Could Affect the Price of Gold

The Spotlight

10 minutes read

Mar 7, 2023

Man cutting the tip of a red percentage sign, symbolizing a slowdown in rate hikes

The U.S. Federal Reserve has decided to slow down its interest rate hikes because it seems like high inflation has started to calm down a bit. This decision may have an impact on the price of gold, and we'll have to see how it all plays out.

The financial world is about to take a wild ride as the Federal Reserve’s rate hike decisions come into play.

In a statement, the Fed recently announced that it’s slowing down the rate hikes. This is because recent reports show that price pressures are easing in the U.S., and the economy is finally getting back on its feet (apparently).

However, this development has raised questions about the potential impact on precious metals, especially gold. Will the price of gold continue its ascent to new heights, or will it stagnate or even decrease?

Of course, it's impossible to know for sure. The slower rate hikes could be seen as a positive development for gold investors, but the future is always unpredictable when it comes to the financial world. In general, the relationship between gold prices and interest rates is complex and influenced by various factors.

One thing is certain, though: the world of finance is never dull, and those who invest in gold are sure to feel the effects of the Fed's decisions.

So, ladies and gentlemen, hold on to your gold bullion🪙as you dive in and analyze how these changes will likely affect your investment portfolio and savings.

What Exactly Do Slower Fed Rate Hikes Mean?

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The U.S. Federal Reserve is in charge of controlling the supply of money in the economy.

In other words, the Fed’s job is to keep the U.S. economy humming — neither too hot nor too cold. Just the perfect lukewarm temperature.

💡What happens when the economy runs too hot?

When the economy starts “running too hot,” the Fed steps in and raises interest rates to help cool it down and keep growth on track.

Otherwise, distortions like inflation and market bubbles can quickly get out of hand and threaten the stability of the entire economy.

High inflation can significantly affect consumer prices and make it difficult for homeowners to meet their mortgage obligations and cover other home-related costs.

In the same way, if the economy slows down and starts going cold, the Fed lowers interest rates to stimulate economic growth by encouraging people and businesses to borrow and invest more.

Typically, the Fed raises interest rates by 0.25 to 0.75 percentage points. It's sometimes expressed in "basis points,” in which case "25 basis points" is 0,25%.

So, basically, the Fed’s action depends solely on how hot or cold the economy gets. In this case, a slower rate hike means that the Fed will reduce the pace at which it increases the benchmark interest rate - the rates will increase at a more gradual rate, as opposed to more rapid and frequent increases. According to the policymakers, this is thanks to the economy’s recovery and easing inflation.

💡Read our SPOTLIGHT to learn more about how the Fed’s moneratry policy impacts the price of gold.

The Relationship Between Gold Prices and Interest Rates

Man trying to unlock gold coin with golden key

There is a widely-held belief that central bank rate increases and the gold price are natural enemies. The argument goes that higher rates reduce the incentive for investors to buy gold, which pays no interest, resulting in a decline in gold's value.

However, some economists have criticized this view as overly simplistic and not reflective of gold's historical performance. These economists argue that gold has had a unique and complex relationship with interest rates during past rate hikes.

Let’s see why.

Gold has a long and storied history as a store of value and a hedge against inflation. During times of economic uncertainty or political instability, investors often turn to gold as a safe haven. In these situations, the price of gold may actually rise even as interest rates increase.

So, while it is true that central bank rate increases can have an impact on the gold market, the relationship between the two is far from straightforward. As always, careful analysis and a nuanced understanding of historical trends are crucial when making investment decisions involving gold and interest rates.

What Happens to the Gold Price When Interest Rates Rise?

Rising interest rates may increase the attractiveness of other investments, potentially decreasing demand for gold and impacting its price.

However, this relationship is not always predictable, and a variety of factors can influence the demand for gold.

What Happens When Rates Fall?

Typically, lower interest rates can signify a troubled economy. As such, investors tend to flock to assets that are considered “safe havens,” such as gold, to protect their wealth. This increases the demand for gold, thus pushing its price upwards.

For instance, as COVID-19 spread throughout the world in 2020, causing severe economic uncertainties, the U.S. Federal Reserve decreased interest rates to 0-0.25% that March. That, in turn, dragged the yield on the benchmark 10-year Treasury note down to an all-time low of 0.52% on 4 August 2020. In return, gold prices hit a record high of $2,072 in August 2020.

How Fed Rate Hikes Have Historically Affected Gold Prices

Historical data show that there's a certain repeating pattern between gold prices and Fed rate hikes. While there has been an inverse relationship between the two, meaning that as interest rates rise, the price of gold tends to decrease, this doesn't necessarily mean that the gold price will always fall when rates go up.

For example, in the 1970s, inflation was soaring. In response, the Fed raised interest rates from 4% in 1971 to over 20% in 1981. During this time, gold prices rose from around $35 per ounce in 1971 to over $800 per ounce in 1980 as investors sought to buy gold to hedge against inflation.

A graph showing how gold prices rose from around $35 per ounce in 1971 to over $800 per ounce in 1980 after the Fed raised interest rates to 20% in 1981.
A graph showing how the gold price reacted to Fed rate hikes between 1971 and 1981.

However, between the 1980 and 1990s, the Fed lowered interest rates from over 20% in 1981 to below 3%. Despite this, gold prices remained relatively stable, fluctuating between $300 and $500 per ounce.

Take a look at the chart below:

A graph showing how the price of gold increased in the months following the December 2018 rate hike by the Fed.
A graph showing how the gold price reacted to Fed rate increases between the 2010s and 2020s.

As you can see, between the 2010s and 2020s, the Fed has raised interest rates several times, with the most recent hike in December 2018 (of course, besides the one that's happening right now). Despite these rate hikes, gold prices have remained relatively stable. In fact, the price of gold actually increased in the months following the December 2018 rate hike.

Therefore, it’s clear that while interest rates can impact yellow metal prices, they are just one factor. Their direct relationship is complex and subject to change.

Gold prices can also be affected by other factors, such as political events, economic data releases, and currency fluctuations.

Lastly, here's a chart from Nicky Shiels, Head of Metals Strategy at MKS PAMP, showing how gold has responded to rate hikes, big and small, in 2022 and 2023:

A graph showing how the gold price increased 19% following smaller rate hikes by the Fed in 2022-2023.
A graph showing how the prices of gold, silver, platinum, and palladium reacted to different rate hikes by the Fed in 2022 and 2023.

Interestingly, this time around, big rate hikes (0,75% hikes) have pushed gold down, while smaller rate hikes (0,25% or 0,5%), like the ones announced recently, have driven gold up 19%.

How Could the New Slower Fed Rate Hikes Affect You?

Man with suitcase looking at pie charts and graphs

Four things could happen:

  1. In general, slower interest rates could benefit your gold and other precious metals investments. Traditionally, experts believe that lower interest rates are beneficial for the prices of precious metals as they make holding a non-yielding asset, such as gold more profitable for you as an investor.
  2. Slower interest rate hikes could increase the gold price outlook slightly. So, you may see fluctuations in the value of your portfolio.
  3. Slowing rates could also impact your loans and borrowing costs. If you have an adjustable-rate mortgage, your interest rate may go down, resulting in lower monthly payments. Additionally, if you're in the market for a new loan, such as a car loan or personal loan, you may be able to get a better interest rate, which could save you money in the long run.
  4. Finally, slowing rates may also impact the job market and home ownership. Lower interest rates could potentially lead to increased consumer spending and business investment, which could stimulate job growth. And if you're in the market to buy a home, lower rates could make it more affordable for you to obtain a mortgage, allowing you to achieve your dream of homeownership.

Overall, while there is no guaranteed outcome, it's important to stay informed and be prepared for potential impacts on your financial situation.🤓

What Are the Key Takeaways

A man fits a golden key into a gold keyhole
  • The Fed controls the supply of money in the economy to keep it at an optimal level.
  • Gold will remain sensitive to the Federal Reserve’s monetary policy. Therefore, a slower pace of interest increments may lead to more demand for gold and increased prices.
  • Historical data show that there's a repeating pattern between gold prices and Fed rate hikes, with an inverse relationship between the two. However, this doesn't necessarily mean that the gold price will always fall when rates go up.
  • Economic uncertainty, fear of recession, and a weakening dollar can push the prices of gold even higher as investors scramble to find better ways to store wealth. As such, we can expect gold prices to increase throughout 2023.

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