6 Reasons why the gold price will drop with interest rate hikes

The FOMC announced another 50bps (0.50%) Interest Rate increase to 4.50% which has lead to short term downside for gold as an initial reaction.

The question for many remains.

Why does gold drop when interest rates rise?

There are a number of reasons, but here are the top 5…

#1: Investors look elsewhere
Higher interest rates can make other investments, such as fixed investment assets and bonds, more attractive to investors. Gold investors will then sell their gold holdings and take advantage of higher interest rate yielding assets. This can lead to investors moving their money out of gold, which can lead to a drop in price.

#2: Stronger U.S Dollar
A higher U.S dollar can lead to gold being more expensive for investors who use other currencies to buy it. This can lead to a drop in demand for gold, which brings the price lower.

#3: Higher borrowing costs
When interest rates rise, this increases the costs of borrowing for business and consumers. They now need to pay more to borrow money to fund their operations. This can hamper the economic activity and drop the demand for buying stocks, precious metals and other investments.

#4: Higher yields on gold-mining companies bonds
Fixed investment gold bonds may seem more attractive than holding and investing in gold itself. This leads to a drop in gold mining stocks which essentially helps with the drop in gold.

#5: More supply less demand
With the factors I mentioned above, with investors leaving gold this increases the supply of the metal and decreases the demand. This leads to a drop in the gold price.

#6: Uncertainty floods the markets
When interest rates go up, this leads to uncertainty in financial markets (where gold is no exception). Investors feel the uncertainty and become worried for the economy. This can lead to a decrease in demand for gold and a drop in its price.

These are all speculations in theory with why the gold price may drop with an increase in interest rates. We notice that the markets don’t always play according…

Since the May 2022 Gold has moved in a sideways consolidation pattern. And this means, we can see the price continue in the range. Until we actually see a break up or down, the analysis in the medium term is sideways. We’ll be watching this carefully.

Follow for more trading and fundamentals tips and analyses from the info I've learnt over the last 20 years as a trader.

Trade well, live free.
Timon
MATI Trader




Higher interest rates can also lead to higher yields on gold-mining companies' bonds, which can make these bonds more attractive to investors. This can lead to a decrease in demand for gold-mining stocks and a drop in the price of gold.


Higher interest rates can also increase the opportunity cost of holding gold, as the metal does not generate any income or interest. This can make investors less likely to hold onto gold as a long-term investment.
Gold is often seen as a hedge against inflation, and higher interest rates can signal that the central bank is trying to keep inflation in check. This can reduce the perceived need for gold as a hedge and lead to a drop in its price.