Here's how interest rates impact gold prices

The price of gold has broken record after record since the start of 2024, and those who invested in the precious metal earlier this year or prior are now seeing hefty returns. In addition to that meteoric climb, the price of gold recently surged past $2,700 per ounce — a new high for the precious metal — which grabbed the attention of even more investors.

Economic uncertainties, global tensions and shifts in the U.S. dollar value have led many to buy gold as an alternative asset. Amid these market conditions, the Federal Reserve just cut interest rates for the first time in four years, with more cuts expected later this year and into 2025. This change in monetary policy could further boost gold's appeal.

But how exactly do interest rates affect gold prices? Here's what experts have to say about the rate environment's impact on the price of this precious metal.

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Here's how interest rates impact gold prices

When interest rates drop, gold often becomes more attractive to investors. Steven Conners, founder and president of Conners Wealth Management, explains why: "As the returns on risk-free assets decline, gold prices [often benefit]," Conners says. 

In other words, when traditionally safe investments offer lower returns due to falling interest rates, gold shines brighter by comparison.

Steven Kibbel, a certified financial planner and senior editor at InternationalMoneyTransfer.com, echoes this sentiment. "Rate cuts generally push gold prices higher because investors look for safe-haven assets when interest rates are low," Kibbel says. 

Kibbel says he's seen clients move money from bonds to gold during these periods, seeking a stable store of value.

History also supports this trend. 

"From 1966 through 2020, an index of gold prices advanced 8.37% annualized when the Fed was lowering interest rates … compared to 5.53% when raising interest rates," Robert R. Johnson, chairman and CEO of Economic Index Associates, says. 

This shows that falling rates can be a "tailwind" for gold prices.

However, the impact of interest rates on gold isn't always straightforward. Conners reminds us to consider the unique factors in today's market. "Geopolitical concerns [have been] more of an influence [lately]," he says.

Ongoing conflicts around the world are significantly impacting gold's value, sometimes overshadowing the effect of interest rates. Conners points out that during times of major geopolitical tension, like what we're experiencing now, gold often serves as a hedge against uncertainties that come with global crises.

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Should today's rates impact your gold investing decisions?

While interest rates influence gold prices, they shouldn't be the sole factor in your investment decision. Johnson suggests focusing on your personal financial goals instead. 

When considering gold investments, "[let your] time horizon and risk tolerance [guide you]," Johnson advises.

If your goal is long-term wealth building, gold isn't your only solid investment option. In fact, "the long-term returns [on gold] are [much] lower than [what you'd get from the] equity markets," Johnson says. 

For example, from 1925 to 2023, gold returned 4.81% annually, while the S&P 500 returned 10.3%. So even though gold can offer short-term stability, it may not match the growth potential of other types of investments over many years.

Given these historical trends, smart investors might view gold as one piece of a larger investment strategy. By combining gold with other assets having different risk and return profiles, you could create a more resilient portfolio that balances stability and growth potential.

The bottom line

Interest rates influence gold's performance, but that shouldn't be the only factor guiding your investment choices. While recent rate cuts may boost gold's appeal, you should consider your broader financial strategy. Kibbel suggests a moderate approach, recommending up to 10% of gold allocation for most portfolios.

Keep in mind that, unlike stocks and bonds, gold doesn't generate income. If you're considering gold investments in the current market, start with a small position and increase it gradually as you see fit. Above all, consult a financial advisor who can help you understand gold's role in a diversified portfolio.