What Happens to Gold and Silver When Interest Rates Change?
The role of interest rates and central bank policy is hand-in-hand with inflation, which heavily influences gold and silver prices. The logic is straightforward: gold and silver do not pay interest or dividends. So when safe investments like U.S. Treasury bonds offer higher interest yields, holding gold or silver instead carries an “opportunity cost.” Investors often compare the return on a 100% safe asset (like a Treasury) with the return on gold (which is basically the change in gold’s price since it has no yield). If interest rates (and thus bond yields) rise, gold can look less attractive by comparison – why hold a bar of gold that yields 0% when you can get, say, 5% on a bond? Conversely, gold becomes relatively more attractive when interest rates are low or falling.
Why Real Interest Rates Matter More Than Nominal Rates
Real interest rates (interest rates minus inflation) are especially important. Analysts have found that changes in real yields explain a lot of gold’s moves1. When real yields are profoundly negative (inflation is higher than interest rates), gold prices tend to soar, as there’s essentially no competition from bonds in terms of preserving purchasing power. PIMCO analysts note that inflation, interest rates, and broad market sentiment all influence gold, but real yields have been “the most significant drivers of gold prices” in recent decades2. In other words, gold thrives when inflation is high relative to interest returns and struggles when the opposite is true.
To illustrate: During 2020, the Federal Reserve slashed interest rates to near-zero and launched huge quantitative easing in response to the pandemic. Inflation fears were on the horizon, but interest rates were pinned low – a recipe for record-breaking gold prices. Sure enough, gold hit a new all-time high above $2,000/oz in 2020. Fast-forward to 2022, the Fed started aggressively raising rates to fight inflation; that put downward pressure on gold for a while since rising yields increased the cost of holding non-yielding metal. As one economics publication explained, the higher the real returns on bonds, the greater the “sacrifice” of holding gold, and thus, the lower the price of gold tends to be3.
- Interest Rates ↑ = Gold/Silver ↓ (usually): When the economy is strong and central banks hike rates (or plan to), it can cap precious metal prices. Higher interest rates strengthen the dollar and give investors alternative ways to earn yield. However, if inflation is soaring even as rates rise, the net effect on gold can be mixed (as seen in 2022, when gold initially fell on rate hikes but then found support as investors feared inflation and geopolitical risks).
- Central Bank Policies and Buying: Beyond setting interest rates, central banks are major players in the gold market. Governments hold gold in reserves, and in recent years, they have been buying gold at a record pace. In fact, central banks worldwide purchased more gold in 2022 than in any year since 1967, as many sought to diversify reserves away from currencies. This trend continued, with central banks aggressively buying gold, signaling long-term confidence in the metal’s value. When central banks buy, it directly boosts demand (and takes supply off the market), helping lift prices. As one analysis noted, when central banks buy gold, it reduces supply in the market and puts upward pressure on prices. Silver, on the other hand, is not typically hoarded by central banks, so it doesn’t enjoy this particular support.
- The U.S. Dollar’s Role: Gold and silver are globally traded in U.S. dollars, so the dollar’s strength is crucial. Typically, a weaker dollar makes gold and silver cheaper for investors holding other currencies, often boosting demand and prices4. Conversely, a strong dollar can weigh on precious metals. For example, if the dollar drops due to expansive monetary policy or large deficits, gold usually climbs as foreign buyers can get more metal for the same amount of their currency. Both metals saw such effects in recent years; periods of dollar weakness (like mid-2020 or late 2022) corresponded with precious metal rallies.
Keep in mind that interest rates and the dollar are closely linked (higher U.S. rates often strengthen the dollar), reinforcing each other’s impact on gold and silver.
Why Monetary Policy Is One of the Biggest Drivers
Monetary policy is a big piece of the puzzle for precious metal prices. Low or falling interest rates, expansionary policy, and a soft dollar create a favorable environment for gold and silver. Tight policy and rising real rates create headwinds. It’s a balancing act: markets are constantly anticipating central bank moves, which is why gold traders parse every Federal Reserve statement closely. As one Reuters report put it, rate cut expectations in 2024 helped steer gold to new highs, forming a “perfect storm” alongside other factors5.
Understanding how interest rates and monetary policy influence gold and silver prices is just one piece of the puzzle. If you’re looking to sell gold or silver, it’s worth checking out our Live Spot Price Pages for up-to-date pricing. You can also explore our guide on How to Safely Buy and Sell Gold for Cash for practical tips on secure transactions. For a broader look at the economic factors at play, head over to What Determines the Price of Gold and Silver, the first in our series on precious metals. And if you’re concerned about fraud, don’t miss our article on Gold Scams: How to Spot and Avoid Fraud.
