Some investors are under the belief that rising interest rates might hurt gold. The idea is that interest rates make higher-yielding investments like bonds and money market funds more alluring, which should in turn weaken gold. The reality is that there is little correlation between interest rates and gold prices.
Throughout the ’70s, gold prices rose even though interest rates were also moving higher. Conversely, the ’80s saw a decline in interest rates and a bear market for the yellow metal. When the rate went from 1% to 5% between 2004 and 2006, gold ballooned an impressive 49%.
Gold price isn’t reliant on interest rates, however. As a commodity, the basics of supply and demand drive the price. Supply of gold is limited and changes slowly, as it takes roughly a decade for a mine to be set up to take advantage of a newly discovered deposit.
Another driver of gold price is the U.S. dollar. When the dollar weakens, demand for gold increases because investors can net more gold for the same amount of dollars. As demand increases, prices go up.
Demand is also being driven by current market volatility and gold’s reputation as a safe haven asset. In an episode of Down to Business, Sprott chief executive Peter Grosskopf said, “There are these systematic risks that have been building for years and been hidden the extent of government support of markets and those systematic risks are starting to show themselves… I think investors just have an increasing appreciation for the fact that the party needs to end. As the party is ending, they get less confident, they look at tail risk insurance, and gold looks like an asset of value to them. So what we see on the front lines is a far broader buying base for gold than we’ve ever seen before.”
Investors can get exposure to physical gold through the Sprott Physical Gold Trust (PHYS). Given the success of gold miners the last time inflation reared its head, exposure to gold miners could also help a portfolio navigate these turbulent times. The Sprott Gold Miners ETF (SGDM) and the Sprott Junior Gold Miners ETF (SGDJ) can provide investors with that exposure.
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