By Cristian Bustos. Originally published at ValueWalk.
With the number of variables at play when it comes to predicting the price of gold, interest rates are yet another hurdle for prospective investors to jump over, and it comes as no surprise that many seem to stir themselves into a panic when any changes occur.
In recent days, gold prices have also started cooling down, coming off from its five-week high, and seeing the biggest average daily price jumps. The hawkish market conditions and the mixed Federal interest rate increase are leaving gold buyers and traders at an undesirable crossing.
Conditions considering gold, and other precious metals have been swaying in the past few months, as 2022 looks to be a record-breaking year, being both good and bad news. For new gold buyers and traders on the market, getting familiar with the gold IRA basics is no easy task, but hyper-growth and interest from a cohort of investors are changing the landscape dramatically.
Well, luckily, the connection between interest rates and gold has been studied rigorously, and we can now get a pretty good insight as to what we may see come next. Let’s dive straight into it and talk about whether or not the interest rate hikes will continue to lower gold prices.
A Researched Phenomenon
The correlation between gold and interest rates has been well-documented. In almost all situations, whenever interest rates go up, the price of gold goes down. Alternatively, whenever interest rates drop, the price of gold increases exponentially.
This has happened countless times since the stock markets conception, and whilst we can never be sure what the future holds in store for us, it seems as though the correlation between gold and interest rates is one of the few things we can predict with near certainty.
This is due to a plethora of reasons, some of which we will talk about in the upcoming section of this article. However, when it comes to whether or not rising interest rates will continue to lower the price of gold, the answer is a resounding yes.
Makes Other Investments More Enticing
One of the main causes behind gold’s drop in price when interest rates rise is simply the fact that other investments become more enticing. It just makes logical sense for investors to take some of their gold and sell in favor of going with fixed interest rates assets, and this is exactly why so many people choose to do just that.
Of course, that’s not to say that investors choose to sell off their gold completely – such a thing would be detrimental. However, taking a small portion of one’s portfolio and investing it in fixed interest rate assets can be an incredibly smart decision when interest rates are rising, and this is but one of many reasons why gold tends to suffer in situations akin to this.
Favorable Gold Stocks in Volatile Conditions
While it seems as if there is a sea of uncertainty ahead of us, investors tend to share an urge of jumping from gold to stocks in unfavorable conditions.
In these situations, it’s hard to state which will offer better security, and while it’s true how precious metals such as gold and other traded natural minerals can help hedge rampant price swings and volatile market conditions.
While some investors share a mutual sentiment of seeing gold as an antiquated trade or addition to a portfolio, gold stocks could opt to be a safer option in markets that are constantly being bashed by major political and governmental headwinds.
The thing to know about trading gold stocks, or looking to purchase shares in a gold mining company or producer, seasoned professionals suggest that investors spend a thorough amount of time researching and understanding the ins and outs of the market and company they’re looking for to purchase stocks of.
Trusted names such as Barrick Gold Corporation (NYSE:GOLD), Gold Field Ltd (NYSE:GFI), and Wheaton Precious Metals (NYSE:WPM) are among the most prominent gold mining companies and producers in the world.
Just like physical gold, the companies behind the extraction and refining process could also experience major sell-off or bottoms if market sentiment starts to dip.
What’s perhaps the most rewarding aspect of buying both gold and gold shares is that while market volatility may increase, the value will never completely bottom out.
This could mean that in a scenario where investors are hot on the sell-off track, gold and other precious metals could retain their value, and remain a valuable asset – the same for those that bear it as an offering or service.
Alternative Scenarios For Gold
In alternative scenarios, there could perhaps be a changing pace of gold’s performance. The stronger dollar, and lowering bond yields can also play a part in the value of gold on the market.
The higher and more frequent the Feds introduce short-term interest rates, the faster gold’s standard inches upwards on the market. In these instances, it would seem that holding gold could become a more lucrative asset than having shares in gold mining companies.
Gold is also changing, not physically, but perhaps more virtually. Gold has gone from natural raw material to a virtual product that many investors are now able to purchase using a smartphone application such as DigiGold.
The digitization of gold has meant that it’s now more accessible to buyers from different economic backgrounds. Secondly, gold as a digital asset makes it easier to trade, and sell when the time is right.
The gold standard is always shifting, and if you consider how diverse gold has become, it’s now easy to understand why its value, perhaps antiquated, is still luring investors and buyers.
Gold Will Always Be The Cornerstone Of Any Professionals Portfolio
At first glance, you may get a little worried if you have already chosen to invest in gold or were considering doing so in the short term future after reading the above two sections. Well, this is entirely unnecessary.
Then there’s the annualized return on gold, and in the current market conditions, it looks as if gold is in for another runner of a year. Over the last three decades, gold has provided an annualized return of 10%, and in the current market, annualized return stands at 11%.
But these indicators can only become a valuable metric when we talk about gold over the long term. Annualized return can be a tricky path to follow if you’re an investor who’s willing to run risks, but still, keep options available and purchases loose in a tight market.
Gold is one of the few assets that is intrinsically valuable, and because of its high demand but low supply, gold always bounces back as soon as interest rates begin to level off. Sure, gold can be pretty volatile in the short term, but when it comes to long-term consistency, gold reigns king, and it will always be the cornerstone of any professional investor’s portfolio.
Some Final Thoughts
Gold has a long-lived track record and is perhaps a more suitable choice for investors that have an actionable plan and trading strategy. Gold is also a lot less likely to see major fluctuations in a sudden market dip – but that’s perhaps the fact that its value is pegged to rising demand, and low supply.
Eventually, gold prices will bounce back to normal as they always do, and it is near-guaranteed that this recent plunge is just a fad. Gold is perhaps one of the best first purchases an investor can make, especially if they’re looking to minimize their risks over the long term.
Besides the fact that gold has a sense of purchase security, it’s also a lot simpler these days to have access to the market. Any type of investor now has the ability to own some form of gold, and in a tight market, it may perhaps be just the right fit for your portfolio.
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