Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Is Gold a Good Investment in a Rising Interest Rates Environment?

By Alexandros SpanosCommoditiesDec 13, 2022 02:03PM ET
www.investing.com/analysis/is-gold-a-good-investment-in-a-rising-interest-rates-environment-200633429
Is Gold a Good Investment in a Rising Interest Rates Environment?
By Alexandros Spanos   |  Dec 13, 2022 02:03PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
Gold
-0.07%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
XAU/USD
+0.05%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
US10Y...
+0.05%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Gold is always seen as a perfect hedge against rising interest rates. Is this valid? Usually, a rising interest rates environment results from the overheating of the economy, and governments step in to "hold" the market. Overheating economy always is accompanied by higher inflation and a decreasing buying power.

Gold investments help investors balance or hedge their investment portfolios in rough times. Gold tends to perform very well when other asset classes like cryptocurrencies and stocks come crashing down in the presence of rising interests.

Economists argue that gold prices go up when interest rates rise, as some previous data implied. But is this still true? Let’s first examine interest rates, why they change and how they affect the prices of gold.

Interest rates

An interest rate is the percentage of principal charged by the lender for the use of its money. The principal is the amount of money loaned. Interest rates affect the cost of loans. As a result, they can speed up or slow down the economy. Interest rates are changing due to three basic factors.

  1. As with every financial component, supply and demand affect interest rates. More specifically, supply and demand concerning credits. This means that if the demand for credit is high, the interest rates will be high and vice versa. On the other hand, if the credit supply is higher, the interest rates will be low. This is how the supply and demand of credit affect the interest rates.
  2. The inflation rate is another factor that affects interest rates. Higher inflation leads to higher borrowing needs due to weaker buying power. On the other hand, lenders need higher security and ask for higher interest as compensation for the decrease in the purchasing power of the money, which will be repaid to them in the future.
  3. Governments use interest rates as a monetary policy tool. By increasing the cost of borrowing among commercial banks, the central bank can influence many other interest rates, such as those on personal loans, business loans, and mortgages.

Gold in a rising interest rates environment

Usually gold prices tend to decrease in a rising interest rate environment as investors can earn more money sitting in cash. Due to the higher interest rates, they avoid investing in gold because gold doesn’t yield any such profits except an increase in its intrinsic value.

On the contrary, when interest rates are low, investors tend to allocate their money to precious metals like gold as yields are low from other interest-bearing financial assets.

How can investors take advantage?

As we can see from the third chart, gold prices seem to lead the real United States 10-Year interest rates. This is mainly due to the discounting of the "Forward guidance," as it is called, which is the public announcement of the Fed's decision about the future interest rates. So investors should keep in mind that in distressing times like the ones we are experiencing now (high inflation), the increase of the interest rates does not imply lower gold prices.

Real 10-Year US and Gold prices
Real 10-Year US and Gold prices

On the contrary, seeing inflation insisting while interest rates are being raised rapidly to cool off the economy, investors start to become skeptical about whether the inflation is transitory or permanent and if an economic crisis is around the corner, as a lot of economists predict. 

This mechanism favors the risk-off sentiment, and investors flee to safe-haven assets like gold, so we have a positive correlation; between rising interest rates and rising gold prices. In conclusion, every investor should carefully examine the interest rates and the macroeconomic environment before investing in safe-haven assets like gold.

Technical analysis - gold

Having in mind all the above and combining fundamental analysis with technical analysis, we managed to book a very nice profit yielding 9.40% with a downside risk of 1,55%, which has almost a Risk/Reward of 6.

Daily channel gold
Daily channel gold

On the technical side, we can see the downward channel on the daily chart of gold which is in line with the inverted correlation between rising interest rates and gold prices. We can easily identify the triple bottom, which shows the slowing momentum of the downside move. 

Triple bottom on gold's 4-hour chart.
Triple bottom on gold's 4-hour chart.

By zooming in on the 4 hours chart, a bullish RSI (Relative Strength Index) is clearly visible. In addition, on the 4 hours chart of the break of the downward trendline, the re-test, and, in the end, the impulsive move after the confirmation of the breakout gave us a "textbook trade."

Is Gold a Good Investment in a Rising Interest Rates Environment?
 

Related Articles

Phil Flynn
The Energy Report: Product Flop By Phil Flynn - Feb 29, 2024 3

Oil prices hit a three-and-a-half month high, yet the oil products flopped in hopes that refiners may be able to meet current demand. Even as gasoline demand hit a three-week high,...

Is Gold a Good Investment in a Rising Interest Rates Environment?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email