Determining the right price of gold is a difficult task. Gold takes the historical role as an asset backing wealth, and therefore is thought of as a reliable investment at all times. Nevertheless, some historical evidence suggests that the price of gold goes down with rising interest rates and rising bonds yields, defeating the concept that gold price is not vulnerable to volatility.
In 2021 Researchers at the Federal Reserve Bank of Chicago analyzed the main factors behind gold prices since 1971 when the US came off the gold standard. They tested the price of gold against changes in inflation expectations, the outlook for economic growth, and real interest rates, using annual, quarterly, and daily data. Their results showed that although Inflation may have been the most obvious driver of gold prices in the 1970s, 1980s, and 1990s, since 2001, long-term real interest rates and economic growth contributed more weight in affecting gold prices.
When the Fed began its latest rate-hiking cycle in March 2022, gold prices soared to $2,000 per ounce. As the Fed continued with rate increases to bring down inflation, gold prices entered a downtrend that persisted until the fall of 2022 when the price hit $1,630.
Further along, at the start of 2023, with inflation cooling off and expectations for a slowdown in Fed rates rising, gold prices recovered reaching the level of $1,900 per ounce in mid-January.
The way gold prices have changed since 2021 seems to support their conclusion: inflation matters, but real interest rates matter most. Find out more about what variables play an important part in forming gold prices by following the link: