Golden Rule: Interest Rates Do Not Influence Precious Metal Prices
Among precious metal investors, it is commonly stated that an increase in interest rates will cause a drop in precious metal prices, and in particular, the price of gold. It follows that a similar drop in interest rates will provide a tailwind or boost to those prices. The logic behind this statement is typically expressed as follows: As the yield on interest paying assets increases, noninterest paying assets such as precious metals should become less valuable, as the income forgone by holding them is reflected by a reduction in price. In other words, why would an investor own gold and incur a storage cost when they could own a U.S. Treasury bond and receive an interest payment? While this argument seems reasonable, we examine if historical return patterns provide empirical support for this adage. As the phrase “an increase in interest rates” is unspecified in this bit of market lore, we examine changes in the 5-year nominal yield, changes in the 5-year real yield, as well as changes in forward-looking interest rate expectations. In each case, we find little evidence to support a price relationship between precious metals and changes in interest rates. Given the current expectation of an interest rate tightening cycle by the U.S. Federal Reserve, we believe investors in precious metals are well-advised to ignore this rule of thumb when deciding to enter or exit their positions.