If you follow financial news, you know low or negative interest rates historically have been good for gold. But why? How is a tangible asset like gold related to a percentage that’s set by the Federal Reserve? Follow along for the explanation.
What Happens to Gold When Interest Rates Drop?
In March 2020, the Federal Reserve—which sets monetary policy for the U.S.—cut the Fed funds rate by 1%, to a range of 0–0.25%, in response to worries about a weakening global economy. The Fed funds rate is the interest rate that banks and credit unions charge each other for overnight loans. In turn, this rate trickles down to impact your credit card rates, savings and CD rates, mortgage rates, and sometimes auto loan rates.
In a low-interest-rate climate, gold tends to attract buyers hunting for a safe-haven asset, MarketWatch reports. George Gero, managing director of RBC Wealth Management, told MarketWatch that the Fed funds rate cut and the global economic pullback aided the uptrend for gold.
In early April 2020, the price of gold was hovering around $1,675/oz., close to the high for 2020 so far.
The World Gold Council notes that the Fed rate cut should further support demand for gold among asset holders, even if consumer demand for gold declines.
All of this underscores the correlation between interest rates and gold.
How Do Bond Yields Affect Gold?
Treasury bond yields also have a relationship with gold.
In tandem with the March 2020 drop of the Fed funds rate, the yield for a benchmark 10-year Treasury bond sank to a record low. In early April 2020, that yield sat below 0.7%.
“When interest rates fall, bond prices tend to rise—driving down yields—as [asset holders] chase a better return by moving money into government bonds instead of keeping their cash in the bank and collecting paltry interest,” Business Insider reports.
But in a low-bond-yield environment, asset holders often seek portfolio alternatives like gold.
“Gold enjoys a number of advantages over Treasury bills, making it a welcome supplement to a portfolio’s liquid-asset holdings and an effective diversifier…. Bullion is an anonymous asset independent of any government’s policy and an international currency free of national boundaries,” according to a report from the World Gold Council.
Should You Buy Gold Now?
Some analysts believe gold represents a go-to safe haven amid the current economic turmoil.
“I think the only thing you can own right now is gold,” Adam Button, managing editor of Forexlive.com, told Kitco News in mid-March 2020.
“Right now” could last for a while.
In early April 2020, Jordan Eliseo, senior investment manager at The Perth Mint, said that in light of the current monetary environment and amid economic and market risks, he doesn’t think the long-term upward trend of gold prices will change anytime soon, reports Kitco News.
“The yellow metal looks set to remain an important asset in well-diversified portfolios,” Eliseo said.
In a CNBC interview published in early April 2020, well-respected gold analyst George Milling-Stanley made a case for gold as an attractive asset in uncertain times. He recommends that gold make up as much as 10% of a portfolio.
“In my view, gold is a hedge against the unexpected, whether it is a hedge against macroeconomics or geopolitical [issues] like wars or pestilence,” Milling-Stanley said. “It has always been protection against the unexpected, whatever that might be. Gold tends to perform whenever anything unexpected happens.”
Low interest rates can be good for gold and good for you. Call U.S. Money Reserve at 844-307-1589 to learn more about current gold prices and the precious metals landscape.
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