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Gold and Silver vs Interest Rates - What is the Relationship?

When interest rates rise, does the price of gold and silver fall and vice versa? We shall examine the relationship between gold and silver and interest rates.

Today is Tuesday 26th January 2021 and we are specifically looking at the relationship between the Interest rates and their effect on gold and silver prices. So let’s take a look.

Firstly, just a quick shout out to our video yesterday which prompted today’s video because of questions we were asked:

Will the US Dollar Resumes its Decline as Gold & Silver Rise
   • Gold & Silver Rise as Dollar Continues to ...  

At just after 1.30 pm GMT we can see that the US Dollar index stands at 90.31 higher than when we produced yesterday’s video but lower than it has been in the past 24 hours.

Gold is standing at $1858 down $8 on the day and silver’s price is $25.57 down 14 cents. Though our suspicions are that these prices may weaken as the day progresses.

There is a common belief. Widely perpetuated that there exists a strong negative correlation between interest rates and the price of gold and silver. We shall concentrate more on gold as it is perceived predominantly to be a monetary metal whereas silver has a much higher industrial application component to it – but is affected in a similar but not the same way.

When looking directly at interest rates and the price of gold, we can see that since 1970 through 2020 he correlation between interest rates and the price of gold has been less than 30%. In statistical terms this is not regarded as particularly significant.

The Bull market that occurred in gold during the 1970’s which reached its peak for that century was against an environment of high and rising interest rates.

Between 1971 and 1980 One-year treasury Bill rates moved from 3.5% up to 16% while gold prices moved from less than $50 an ounce to just shy of $850 an ounce.

During this period, there were short term instances of correlation but taking the decade into account and particularly large price moves from 1978 with equally aggressive rate rises certainly suggests that the relationship is far from negatively correlated.

Broadly the next 20 years showed declining gold prices plus declining interest rates.

Some economists will suggest on the face of it that In the 2000’s generally interest rates declined and gold prices rose therefore the negative correlation applies. This can be counteracted by the fact that gold prices peaked well before the more severe declines in interest rates began.

The Federal Funds rate rose from 1% - 5% between 2004 – 2006 and gold also rose during this period u almost 50%

The 2008 crisis is an example in point as one would have expected gold prices to soar at this time as rates were slashed to 0% -0.25% but it waited until 2011 before it did so.

So what does drive gold prices then if its not interest rates.

In the long-run, manipulation aside - not being considered for the purpose of this debate, it’s a function of supply and demand.

One could argue that rising and higher interest rates may be bullish for gold prices, simply because they are typically bearish for stocks.

So while rising interest rates may increase the U.S. dollar, pushing gold prices lower (because gold is denominated in U.S. dollars), factors such as equity prices and volatility coupled with general supply and demand are considered by many as the real drivers of the price of gold.

The issue of inflation is, in our view, a large factor and we shall discuss this in another video.

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#Gold
#Silver
#Interest rates
#Negative Correlation