Contact us
CALL US NOW 1-888-GOLD-160

Rising Interest Rates and Gold: Perception Doesn’t Match Reality

  by    0   1

Even with rising interest rates and the dollar at multi-year highs, gold has held its ground. Nevertheless, we have yet to see a big spike in gold prices despite persistent inflation. Why not?

The perception is that rising interest rates are always bad for gold. But does perception match up with reality?

If history is any indication, the answer is no.

Nevertheless, with the Federal Reserve delivering its biggest rate hike since 1994, the mainstream has remained wary. Even before the Fed started raising rates, the anticipation of the central bank aggressively fighting inflation created headwinds for gold. But a careful look at history reveals that we are nowhere near an interest rate environment that should negatively impact gold.

At some point, we should expect a revision as the mean as markets come to grips with reality and recognize that real interest rates aren’t going to rise high enough to undermine gold’s performance.

Holding gold does not generate interest income like a bond or a bank account. If interest rates rise and you’re holding gold, you’re forgoing the interest income you could earn if you instead owned a bond or put dollars in a money market account. That’s why rising interest rates tend to create headwinds for gold. And it’s why we’ve seen gold sell off on high inflation news. The markets expect the Fed to fight inflation with rate hikes, thus raising the opportunity cost of holding gold.

But despite the recent hikes, interest rates remain deeply negative. And they will likely remain that way for a long time. Real interest rates equal the nominal rate (the numbers quoted on the news) minus inflation. Today, the nominal rate is 1.5%. Inflation is running at around 8.6% (using the cooked government numbers). So, the real interest rate is -7.1.

To state the obvious, there is no “opportunity cost” in holding gold when real rates are deeply negative.

For the sake of argument, let’s assume the Fed manages to meet its projections and can bring the CPI back down to 2.3% by 2024 with a terminal rate of 3.8%. This would yield a real rate of 1.5% (I find this scenario implausible given that we’re already at the point where rate hikes will likely pop the economic bubble and precipitate a massive crash in the economy – but again, we’re accepting the Fed projection to make a point.)

Even if short-term interest rates climb to 1.5% in real terms, they would remain below an interest rate environment that is historically negative for gold.

In fact, according to an analysis by the World Gold Council, real yields below 2.5% have not been substantially negative for gold. You have to get into a high real rate environment before you see negative returns on gold.

Our analysis suggests that US real rates would need to move above 2.5% for there to be a meaningful long-term negative impact on gold. A return to a real rate environment of 0–2.5% would likely impact gold, but only to the extent of it realizing slightly below its long-term average real return of 6.1% Rising rates certainly provide more headwinds to gold than falling rates, but gold can still provide positive real returns in a rising rate environment. Historically, it required an interest rate environment of over 2.5% in real terms to have a significant negative impact on gold prices.”

Download SchiffGold's Gold vs GLD EFT's Free Guide

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Will the Fed Stay in the Ring With Inflation? Or Is the Tough Talk Just Hot Air?

Cooling Consumer Price Index data did not cool the hot rhetoric coming from some Federal Reserve members. The question is whether this is a bunch of hot air or do these central bankers actually have the fortitude to move forward with rate hikes in the face of a sinking economy?


CPI Cools Modestly; How Will the Fed Play This?

As expected, the Consumer Price index cooled a bit thanks to falling gasoline prices. The question is will this give the Federal Reserve the excuse it needs bow out of the inflation fight? The Consumer Price Index for July was up 8.5% year-on-year. That was down from June’s 9.1% print and slightly below the 8.7% […]


Peter Schiff Damn the Recession! It’s Rate Hikes Ahead!

After the second straight negative GDP print in Q2, the markets began anticipating that the Federal Reserve would pivot away from its monetary tightening. But a few choice words from some Fed members this week caused thoughts of a pivot to pivot. As Peter Schiff put it in his podcast, it appears to be damn […]


Is the Federal Reserve at the End of Its Rope?

The Federal Reserve delivered another 75 basis point interest rate hike at its July FOMC meeting. This pushes the federal funds rate over the 2% threshold to between 2.25% and 2.5%. The mainstream media emphasized the size of the hike. One headline called it “a second super-sized hike,” with many other mainstream pundits noting that […]


Taking Gaslighting to New Heights the White House Changes the Definition of “Recession”

You don’t have to worry about that recession anymore. The White House fixed it. And by “fixed it” I mean it just changed the commonly held definition of a recession.


About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now