Rising Rates Don't Always Mean Bad News for Gold and Silver

Investors are selling gold and silver due to rising interest rates, but is this conventional wisdom correct? According to Adam Sharp, a long-time financial writer and Fed watcher for the Daily Reckoning, investors who thrived during periods of stagflation and high inflation, such as the 1970s, did so by buying hard assets like gold and silver.

During this period, gold rose by nearly 2,329% while bond yields rose at roughly the same rate. This challenges the conventional wisdom that a high-interest-rate environment is bearish for gold.

Sharp explains that when real interest rates fall or turn negative, the relative cost of holding precious metals diminishes, making them more attractive as safe-haven and wealth-preservation assets. Real interest rates are calculated by subtracting price inflation from the stated rate.

In the 1970s, for example, the real interest rate on a 3-month T-bill was running at -4.6% due to high price inflation. Meanwhile, gold rose over 7 times during this period. Sharp notes that when the Fed raises rates, it's usually due to inflation, which drives people into gold.