RE: July 17 Monday9 Jul 2023 08:52
"The UK interest rate is the rate at which the Bank of England lends money to other banks. This charge, sometimes called “the cost of money,” determines how much individuals and businesses must pay to borrow.
The impact of increases to the interest rate is significant and affects the economy through several channels. The main effect is the increased cost of borrowing. UK businesses and consumers must pay more to take out loans. Higher prices reduce disposable income, dampening aggregate demand, forcing people to allocate more resources to credit repayment, and slowing the expansion of the money supply.
The Historical Relationship Between Interest Rates And The Price Of Gold
Historically, commentators believe that gold prices and interest rates correlate negatively. Gold prices fall when the Bank of England raises interest rates to calm a booming economy (and control UK inflation rates) and rise when it lowers them.
However, the relationship is more complex. A long-term look through historical data reveals no relationship between interest rates and gold. Throughout much of the 1970s, gold prices rose sharply, just as interest rates moved higher. The 1980s saw declining interest rates and a bear market in gold.
Other Factors, Besides The Interest Rate, That Affect The Price Of Gold
That’s because inflation expectations, liquidity concerns, and economic growth also play a role in the price of gold. For instance, when investors expect inflation and low economic growth (as in the 1970s and today), gold becomes a safe-haven asset. Falling yields on stocks combined with seigniorage on cash force them to consider uncorrelated assets that can survive the inflationary storm.
Similarly, liquidity concerns can spark intense demand for gold. If investors fear a “Minsky moment” – a crash in the global financial system – they may also see the benefit in exchanging their bank deposits for precious metals. This way, they can retain liquidity and protect themselves from a banking crisis.
Geopolitical events can also play a role. Physical gold can survive wars, trade embargoes, and other catastrophes, while stocks (and stock exchanges) may not.
Investors see gold as a safe-haven because it generally retains its value in times of economic uncertainty, including rising interest rates. Even if rate rises signal deflationary forces, geopolitical events can trigger buying as investors look for less risky assets to satisfy their risk tolerance preferences.