Buy Gold If You Think Interest Rates Will Rise


Investors commonly assume that rising interest rates adversely impact the gold price. The intuition is that if interest rates rise, this makes gold less appealing to own than interest-bearing assets. Such reasoning prompted Dominic Schnider to tell CNBC reporter Ansuya Harjani that he expects the price of gold to continue to fall as investors prepare for a rising Fed funds rate.

But this intuition is historically unfounded: A rising Fed funds rate has, more often than not, coincided with rising gold prices.

This is exemplified by gold’s bull market in the 1970s. From 1971 through 1974, the Fed funds rate went from roughly 5 percent to 10 percent, during which time the price of gold rose from $35 per ounce to roughly $200 per ounce. The Fed funds rate fell back to 5 percent by 1975 as the price of gold fell by nearly 50 percent. The Fed funds rate soared from 1977, peaking at more than 20 percent in 1980, and during that time frame, gold reached a peak of $850 per ounce.