Dubai: If you have monitored the price of gold on a regular basis, you would have noticed how costs of the precious metal are affected by certain economic determinants that would either result in it skyrocketing to levels an investor can make quick profits or slumping to what could prove lucrative later.
Gold prices advanced sharply on increasing confidence that the world’s top economy, the US, will this week cut interest rates for the first time since 2020, with many other central banks like the UAE following suit. But will the interest rate cut further affect gold prices in the coming weeks?
“The relationship between interest rates and gold prices has always been a tad complicated to make sense of. In general, they have an inverse relationship. Therefore, gold prices rise as interest rates fall, and gold prices fall as interest rates rise,” said Rochelle Mariam, precious metals retail analyst in Dubai.
Link between gold and interest rates
Here’s how it works often. When interest rates rise, it signals that the economy is strong. This is when investors feel confident purchasing higher risk assets like stocks. If demand for other assets increases, gold and precious metal demand decreases and prices will subsequently fall.
“However, as recent history has proven, it’s not a direct correlation. In fact, after the US Federal Reserve raised interest rates at 10 consecutive meetings beginning in March 2022, the price of gold hit its all-time high in December 2023 amid the highest interest rates since 2007,” she added.
“In reality, other economic factors — like how confident consumers are to spend money or the levels of hiring for jobs in different sectors — could signal investors to stay away from higher risk assets even in a high interest rate environment, meaning you wouldn’t see the expected effect on gold prices.”
While higher interest rates create headwinds for many asset classes, gold stands out as an attractive investment in the current environment, i.e. when interest rate hikes loom
Gold prices don’t always move with rates
In other words, interest rates worldwide can have an inverse effect on gold prices, but only when paired with certain economic factors. Meanwhile, in tandem with global costs, gold continued their upward price trend in the UAE too, rising by more than Dh1 per gram at the opening of the markets on Monday.
In the UAE, the 24-karat variant of the metal was trading at Dh313.5 per gram by evening, as compared to last night’s close of Dh312.25. Among the other variants, 22-karat, 21-karat and 18-karat also opened higher at Dh290.25, Dh281.00 and Dh240.75 per gram, respectively. Check latest price here.
Globally, gold is inching closer to a never-seen-before $2,600 an ounce on account of, as mentioned above, investors betting on more interest rate cuts in the coming months or before the end of the year. But then again, does this mean price will keep rising henceforth? Here’s what UAE-based analysts think.
So even though the correlation between gold prices and interest rates are not guaranteed and it’s safe to assume that the gold price goes up when interest rates go down, and down when rates go up, rates are expected to stay high as long as rates are, and the analysts agree.
“While higher interest rates create headwinds for many asset classes, gold stands out as an attractive investment in the current environment, i.e. when interest rate hikes loom,” explained Zubair Shakeel, a UAE-based investment manager. “This is because prices rise further only before they fall.
“The ability of the precious metal to hedge inflation, perform well when rates are elevated and provide safe-haven diversification makes it an appealing addition to anybody’s investment portfolio – be it if you are still new to betting a part of your savings in the market or not."
"Fed rate cuts are poised to bring capital back into gold ETFs, a component largely absent of the sharp gold rally observed in the last two years," analysts Lina Thomas and Daan Struyven said in a note, reiterating the bank's forecast for surge to $2,700 an ounce by early next year.
The precious metal has been one of the strongest performing major commodities this year, surging by about a quarter and hitting successive records as central banks boost purchases and traders look ahead of the Fed's pivot to monetary easing.
Investors remain divided about whether the US central bank will kick off its easing cycle this week with a half-point reduction or - as Goldman Sachs expects - a more modest 25-basis-point cut.
Bottom line: No immediate change in rates, but brace for year-end price easing
While it is widely expected that interest rates will start to decrease with global inflation currently showing signs of cooling, both Shakeel and Mariam agree that gold buyers shouldn’t expect a huge drop in either interest or gold rates before the end of this year.
“Waiting until 2025 could be your best bet if you want to snag even lower rates. But don’t lose hope, gold does generally get cheaper by the year-end, at least from the pricey and buyer-averse levels it is at right now,” Mariam added. “So don’t set you gold buying plans in stone just yet!
“Gold rates in the UAE fluctuate year-round, but we often see a dip in the winter months on global market trends and local demand patterns. If you are eyeing the calendar, December has historically been a good month for buying gold. So, you might catch a good deal then!”
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