Elevated interest rates can affect gold demand — and prices — in a few critical ways, according to Lear Capital chairman and founder Kevin DeMeritt.
As inflation soared in 2022 — at one point, reaching 9.1%, its highest point in more than 40 years — the Federal Reserve’s Federal Open Market Committee began raising the target range for the federal funds rate, an interest rate banks use to lend each other money, in an attempt to cool the economy and bring inflation down.
It’s a move the Fed has made before; it can bring about the intended result, but the process isn’t necessarily painless. In 1980, when inflation shot up to more than 14%, Paul Volcker, who at the time was serving as the chair of the Federal Reserve, supported the federal funds rate’s target range being increased. Inflation declined to 5% by the fall of 1982, although the U.S. fell into a 16-month recession and experienced a rise in unemployment.
“Everybody was thinking in 1978, when inflation was 8%, ‘When is this all going to end?’” Kevin DeMeritt says. “Volcker came in and said, ‘We have got to just push up interest rates as high and as fast as humanly possible,’ and it went all the way up to 14% and 15% — almost double where [rates] were in 1978.”
The Current Interest Rate Landscape
Beginning in March of last year, the FOMC increased the federal funds rate’s target range from 0%-0.25% to 0.25% to 0.50%; it then again nudged the range upward at its May 2022 meeting to 0.75% to 1%, and in June, increased it to 1.5% to 1.75% — the target range’s largest spike since 1994.
Following subsequent rate increases in September and October 2022, as inflation remained stubbornly above the FOMC’s intended 2% target, the committee continued to periodically raise the target range for the federal funds rate throughout 2023. As of its last meeting from Oct. 31 to Nov. 1, the range currently stands at 5.25 to 5.5%.
Interest rate increases can have a ripple effect throughout the economy, generating outcomes such as higher borrowing costs — which we’ve seen in recent months following the Fed’s series of rate hikes. The average rate for a 30-year fixed-rate mortgage loan, for example, which was 3.22% in January 2022, had risen to more than 6% by the end of last year, according to Freddie Mac data; as of Nov. 2, 2023, the rate had reached 7.76%.
Consumers who had borrowed money in recent years may experience sticker shock when looking into loans for major purchases, according to Kevin DeMeritt.
“They’re used to 3.5%, 4% mortgage rates, and then rates move up to 7% or 8%,” he says. “At some point, you’re going to want a new car, and the interest rate is going to be much different than, ‘I’ll give you 1% interest for the first four or five years to purchase the car.’ Slowly but surely, purchasing power drops through higher interest rates. Your bills go up, everything else is going up.”
That can prompt a number of people to pull back on spending. Companies, too, can struggle when borrowing costs increase. Greater capital expenses can delay growth plans or even put operations at risk, potentially reducing a company’s profitability — and the returns investors will receive.
More than a quarter — 26% — of small business owners said they paid a higher rate on their most recent loan, according to information the nonprofit National Federation of Independent Business released in September, an increase from the amount who reported paying more in August. As the NFIB noted, loan interest rates have more than doubled, and financing, in general, can be harder to obtain.
Concern about the impact higher borrowing costs could have on businesses may cause investors to shy away from the stock market and instead gravitate toward what they perceive to be less risky investments, such as precious metals like gold.
“We’re starting to see more and more people become concerned about the volatility in the markets, which happens when you have high inflation and higher interest rates,” Kevin DeMeritt says. “If each year, I’m losing [a percentage] of the value of my paper money in purchasing power, I need something to offset that. Gold is going to be a great alternative because it happened, in the past, to be one of the better assets.”
A number of Lear Capital customers say they’ve turned to precious metals because of their ability to provide stability.
“After watching my funds disappear from my other investments, I decided that I would be better off with precious metals than having a portfolio that has had a track record of losses,” investor Frank B. said in one of the Lear Capital reviews published on the Trustpilot platform. “Now I have peace of mind that regardless of what happens, I have what I have. If the dollar value drops, I win with precious metals.”
In another one of the Lear Capital reviews that have been shared online, Thena, who bought precious metal assets from the company, said economic factors were a reason she chose to invest in precious metals.
“I recently decided to exchange money from a bank account, where it earns essentially nothing, to purchase silver coins as a hedge against inflation,” she said. “I received all the information I needed to make an informed decision.”
What’s Next for Interest Rates
The FOMC is scheduled to meet one more time this year, in December; while it’s unknown if another rate hike will be approved at that gathering, in recent months, the Fed increased its official estimate of what it anticipates the median federal funds rate will be for this year and 2024.
In March, the Fed forecast the rate would ultimately be 5.1% for 2023 and 4.3% in 2024. However, in its latest Summary of Economic Projections update, which was issued in September, the Fed said it anticipated the federal funds rate average would instead be 5.6% for 2023 and 4.6% for 2024.
If future rate increases occur, gold’s value may grow. Historically, precious metal prices have risen when interest rates do, Kevin DeMeritt says. In 1980, for instance, as interest rates reached a new high of more than 15%, prices for both silver and gold doubled, reaching an unprecedented level — $49.50 for silver and $850 for gold.
“Gold has an inverse relationship to stocks and other types of assets,” Kevin DeMeritt says. “Gold and silver have historically performed very well in times of inflation. Precious metals [can help serve as] a hedge against some of that economic uncertainty.”
Some investors, DeMeritt says, appreciate being able to possess a tangible asset that has had a strong track record during economically challenging times in the past.
After making his first precious metals purchase with Lear Capital, Bob, from Queen Creek, Arizona, says he reached out again the next month to place a second order.
“My family [has] more confidence and faith knowing we’re invested in real currency,” Bob said in one of the Lear Capital reviews on the website ConsumerAffairs. “We trust Lear Capital completely. Owning real gold and silver provides a genuine feeling of security amid all of the crazy financial news of the day.”
