Fed Rate Hikes: Gold's Relationship with Interest Rates is More Nuanced than Expected

The US Federal Reserve's interest rate hikes have far-reaching effects on global markets. When the Fed raises its benchmark interest rate, borrowing becomes more expensive across the US economy, aiming to cool inflation.

Higher rates make US government bonds and fixed deposits more attractive due to higher interest payments, causing money to flow toward these assets. Gold, which doesn't pay interest or dividends, appears less appealing in comparison.

However, this principle isn't always true. During some Fed hiking cycles, including parts of 2022 and 2023, gold held firm or even climbed. This was because rate hikes didn't occur in isolation; investors believed the Fed was hiking into a slowing economy or a financial crisis, prompting them to rush toward gold as a safe haven.

The relationship between the Fed's interest rates and gold is more nuanced than previously thought. Real interest rates, nominal rates minus inflation, are key. If the Fed raises rates but inflation is high, real rates remain negative, making holding cash or bonds a losing proposition in terms of purchasing power. In such cases, gold becomes attractive because it holds its real value over time.