How Gold Prices Are Impacted When The US Federal Reserve Hikes Interest Rates?

Let's begin by first understanding what is the Federal Funds Rate or the interest rate set by the US Federal Reserve. When the US Federal Reserve raises interest also called the federal funds rate, it acts as a reference for the interest rates big commercial banks charge each other for overnight loans. This means if the US Fed raises the interest rates, borrowing of loans for commercial banks from each other becomes more expensive. In India, when interest rates are raised by the RBI, commercial banks have to borrow money from the RBI at higher interest rates.

In short, the cost of borrowing for banks becomes more expensive, when interest rates are hiked. If this becomes expensive, they increase fixed deposit interest rates as well, so as to garner resources from individuals. This makes all interest bearing instruments like fixed deposits attractive.

What is the impact of US Federal Reserve interest rate hike on gold rates?

When interest rates are hiked in the US or anywhere across the world, individuals will move money from commodities like gold to fixed interest bearing instruments like fixed deposits.

This puts pressure on gold prices, which tends to fall. However, this might not always happen, as an interest rate hike could have always been factored. For example, the US Federal Reserve hiked interest rates, but, gold barely moved, simply because the hike in the interest rate was always factored in.

What is important to note here is that in such cases, the commentary from the US Fed Chairman, Jerome Powell becomes more important. For example, if the Chairperson anticipates more interest rate hikes going forward, gold would come under further pressure. Having said that gold is up marginally in trade today at $1883 an ounce, as the hike in interest rates were already factored in.

What about gold prices in India?

In India, gold prices are impacted by international prices, as we import gold and do not mine our own gold. If gold prices in the global market go higher, it moves higher in India as well. So, when the US Fed hikes interest rates, it could have a direct bearing on gold prices in India.

Conclusion

In short, when interest rates are hiked investors move money from gold and place it into debt instruments like fixed deposits. Even if they do not actually do that, gold prices could fall purely on account of a sentimental reaction that interest rates are going higher.