How gold prices could be affected by another rate hike

After a series of 10 rate hikes driven by the Federal Reserve’s goal to bring down inflation over the past year, the Fed is set to make its next rate decision later this month.

Ahead of the meeting, signals have been mixed. In May, Fed Chair Jerome Powell said the committee would make future rate decisions “meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation,” before emphasizing: “We are prepared to do more if greater monetary policy restraint is warranted.”

More recently, comments from Fed governors have signaled a rate hike could be coming — if not this month, then in the near future. One stated there was no “compelling” reason to pause rate hikes now, while another argued for a “skip” in rate hikes this month, before potentially raising them again in July.

For gold investors, interest rates set by the Fed can influence not only market changes but larger economic factors that tend to draw people to (or away from) gold. If the Fed’s recent signaling holds, and more rate hikes are on the horizon this month or later in the year, gold prices could be effected.

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How gold prices could be affected by another rate hike

There are plenty of factors that contribute to gold’s value. The Fed’s rate decisions are just one of many — but they can influence gold prices.

Rising interest rates can make other safe, yield-earning investments more appealing — such as high-yield savings accounts, money market funds and even bonds. So some believe that when these other safe havens become more appealing, gold isn’t the only secure investment option available. 

Looking back at over a year of consecutive rate hikes, gold prices tend to cool in anticipation of or following an increase in interest rates. Last year, gold’s value started falling after the first rate hike in March, before bottoming out and starting to rise again around November.

However, that’s not always the case, thanks to those other factors that also impact gold. For instance, after the March rate hike of 25 basis points, the price of gold (which was already rising) continued to improve and reach near all-time highs by April — likely spurred on by recent bank failures. After the most recent increase in May, too, gold prices stayed strong due to increased demand amid the potential debt default.

Ultimately, another rate hike from the Fed could lead to a temporary dip in gold prices. But a breadth of contributing factors can help mitigate those effects, especially for long-term investors.

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Why now is a good time to consider gold

Regardless of what the rate activity does to gold’s price, now is a still a good time to consider it as part of your portfolio, for a few reasons.

To start, inflation is still elevated. Though the Fed’s moves are showing progress, inflation is well above its 2% target. Gold is often viewed as a hedge against inflation and can help you preserve purchasing power.

Gold is also a good way to diversify against a potential recession. Gold often moves independently of traditional stock prices. Putting a portion of your portfolio into gold may help you stay afloat if other markets experience losses during a period of downturn.

Finally, gold investors can benefit from focusing on these long-term benefits over short-term price fluctuations. While short-term changes can make you feel uncertain, you can benefit over time by developing a long-term plan that you can stick with through changing economic cycles.

The bottom line

It’s still unclear whether the Fed will decide to pause its rate hikes, increase rates again or potentially raise interest rates later in the year after skipping this month. Whatever the decision may be, gold investors can still benefit from the precious metal. Even if gold’s price does cool slightly following another rate hike, its appeal as a way to diversify your portfolio and hedge against other markets (as well as inflation) can still be useful for your long-term plan. 

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