Gold Price Faces Fresh Test as Higher Interest Rates Bite

The price of gold has surged by 17% over the past year, but recent changes in monetary policy are testing its strength. The Federal Reserve raised interest rates for the first time since July 2023, pushing up yields and strengthening the dollar.

This move is creating a headwind for gold in the short term, as investors weigh the opportunity cost of holding an asset that generates no income when rates are rising. According to Rick Kanda, managing director at The Gold Bullion Company, 'gold doesn't generate interest, so when interest rates and bond yields rise, investors are more keen to hold yield-bearing assets as opposed to gold.'

Despite the challenges posed by higher interest rates, demand for gold ETFs remains strong. August was the third-strongest month for gold returns in 25 years, with ETF buying among the major contributors to the rally.