Gold and interest rates

Phase 1 initial reaction: Back in 2022 when the Federal Reserve initiated aggressive rate hikes—raising the target rate from 0.08% in Feb-22 to 3.08% in Oct-22 (a 3.00% absolute increase)—gold experienced immediate downside pressure.

Gold closed at $1,908 in Feb-22 (peaking around $1,937 in Mar-22 amid early geopolitical tensions) before dropping to a low of $1,633 in Oct-22.

This represents a decline of 14.4% ($275 drop), illustrating the traditional inverse reaction where higher opportunity costs and yields weigh down non-yielding bullion.

Phase 2: Delayed Real Reaction & Rally (Oct 2022 – Aug 2024)

Despite the Fed continuing to raise rates aggressively to 5.33% by Aug-23 and holding them at terminal levels through Aug-24 (an overall hike of 5.25 percentage points), gold reversed course and rallied sharply. From the Oct-22 bottom of $1,633, gold climbed to $2,503 by Aug-24. This marks a 53.3% rally (a $870 gain) during sustained rate hikes and elevated rates, accumulating a net gain of $607 (+32%) over the entire timeframe (Apr-22 to Aug-24 baseline).
​Key takeaway

While interest rate hikes create an immediate downward shock on gold, persistent high rates and yields eventually intensify fiscal pressure by inflating debt servicing costs and government deficits. Market expectations of long-term sovereign debt stress ultimate power a delayed, multi-year bull run in gold.

This dynamic starkly contrasts with the Volcker era of the early 1980s, when extreme interest rates near 20% effectively crushed gold prices long-term without triggering fiscal solvency concerns when government debt level was under control!