Here's how interest rates affect the price of gold

The Gold price has broken one record after another since the start of 2024, and those who invested in the precious metal earlier this year or earlier can now enjoy hefty returns. In addition to this meteoric rise, the price of gold has been rising recently rose to over $2,700 an ounce – a new high for the precious metal – which caught the attention of even more investors.

Economic uncertainties, global tensions and changes in the value of the US dollar have led many to purchase gold as an alternative asset. Amid these market conditions, the Federal Reserve has just lower interest rates for the first time in four years, with further cuts expected later this year and into 2025. This change in monetary policy could continue increase the attractiveness of gold.

But how exactly do interest rates affect the price of gold? Here's what experts say about the impact of the interest rate environment on the price of this precious metal.

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Here's how interest rates affect the price of gold

When interest rates fall, Gold often becomes more attractive to investors. Steven Conners, founder and president of Conners Wealth Management, explains why: “When returns on risk-free assets decline, gold prices (often benefit),” says Conners.

In other words, if traditionally safe investments offer lower returns due to falling interest rates, Gold shines brighter in comparison.

Steven Kibbel, certified financial planner and senior editor at InternationalMoneyTransfer.com, shares this opinion. “Interest rate cuts generally drive gold prices higher because investors look for safe havens when interest rates are low,” says Kibbel.

Kibbel says he has seen clients move money from bonds into gold in pursuit of it during these periods a stable store of value.

History also supports this trend.

“From 1966 to 2020, a gold price index rose 8.37% on an annualized basis when the Fed cut interest rates…compared to 5.53% when interest rates were raised,” says Robert R. Johnson, chairman and CEO of Economic Index Associates.

This shows that falling interest rates can be a “tailwind” for gold prices.

However, the impact of interest rates on gold is not always clear. Conners reminds us to consider the unique factors of today's market. “Geopolitical concerns have had a greater impact (recently),” he says.

Ongoing conflicts around the world significantly impact the value of gold, sometimes overshadowing the impact of interest rates. Conners points out that gold often plays a role in times of great geopolitical tensions like we are experiencing now a hedge against uncertainties that accompany global crises.

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Should today's interest rates impact your gold investment decisions?

While interest rates have an impact on the price of goldthey should not be the only factor in your investment decision. Johnson suggests focusing on your personal financial goals instead.

If you're considering gold investing, “let your time horizon and risk tolerance be your guide,” advises Johnson.

If your goal is long-term wealth creation, gold is not your only solid investment option. In fact, “the long-term returns (of gold) are (much) lower than (what you would get in) the stock market,” Johnson says.

For example, from 1925 to 2023, gold returned 4.81% annually, while the S&P 500 returned 10.3%. So while gold can provide short-term stability, it may not achieve the growth potential of other types of investments over many years.

Given these historical trends, smart investors might consider gold as part of a larger investment strategy. This is possible by combining gold with other assets with different risk and return profiles Create a more resilient portfolio that balances stability and growth potential.

The end result

Interest rates affect gold's performance, but that shouldn't be the only factor influencing your investment decisions. While recent interest rate cuts may increase gold's appeal, you should consider your broader financial strategy. Kibbel suggests a moderate approach and recommends a gold allocation of up to 10% for most portfolios.

Remember that gold, unlike stocks and bonds, does not generate income. If you are thinking about investing in gold in the current market, start with a small position and gradually increase it as you see fit. Above all, consult a financial advisor who can help you understand gold's role in a diversified portfolio.