Is there a correlation between interest rates and precious metal prices?
Most would like to think so.
Many investors hold the belief that when interest rates are high, people are attracted to bonds and other savings accounts. They will therefore put less money in physical assets, which include gold and silver.
Sounds good in theory, but is this always true? Does history show a negative relationship between gold and silver prices and interest rates?
Historical Relationship Between Precious Metals and Interest Rates
The short answer? Not likely.
This theory is not supported by historical data. In fact, history over the past 50 years has only shown a correlation of about 28%.
A look back at the 1970s bull market in gold shows that when gold prices were steadily rising, interest rates were doing the same. Silver prices have also had more of a direct correlation with interest rates rather than a negative one.
A closer look at this time period actually shows a fairly strong positive correlation.
In 1973 to 1974, gold prices spiked during a time when interest rates were already up. From 1975 to 1976, gold prices began trending downwards, as did interest rates. A few years later in 1978, the interest rates and gold prices began another ascension together.
Negative Correlation or Not?
The most recent bull market for gold, the 2000s, saw interest rates fall as gold prices rose. But this one period alone is not enough to definitively state a true negative correlation between the two.
Also, the theory states the gold prices are negatively driven by interest rate, but gold prices were on the rise well in advance of interest rates heading down. So it can not be said that this particular interest rate decline had anything to do with gold prices.
So, if interest rates aren’t driving the prices of these precious metals, then what is?
The prices seem to mainly depend on investors and what their expectations are for the future. If investors can tell that interest rates are on the rise, silver and gold prices may go down well in advance of the interest rate announcement.
In conclusion, the long-held belief about a negative correlation between interest rates and prices of silver and gold seems to be historically inaccurate. So, as you’ve heard many times before, you can’t believe everything you hear.