Higher interest rates may create short-term pressure on gold, but the bigger story could be what happens to the US dollar, inflation and government debt
The US Federal Reserve has raised interest rates for the first time since 2023, delivering the 25 basis point increase markets had been anticipating.
The Federal Open Market Committee voted unanimously to lift the federal funds target range from 3.50%–3.75% to 3.75%–4.00%. The Fed said economic activity remains solid, while inflation remains elevated and uncertainty continues to be high.
The decision represents an important shift for financial markets.
Higher interest rates generally increase the opportunity cost of holding gold because, unlike bonds or cash, physical gold does not pay interest.
That can put pressure on gold prices.
But there is another side to the equation.
A rate hike does not automatically mean gold has to fall.
In fact, some analysts believe any significant weakness could ultimately create an opportunity for long-term physical gold buyers.
Gold has already been dealing with higher rates
Gold has spent recent weeks responding to a combination of higher Treasury yields, a stronger US dollar and increasing expectations of tighter Federal Reserve policy.
Yet the metal has continued to find buyers around lower price levels.
Alex Kuptsikevich, Chief Market Analyst at FxPro, recently argued that gold’s medium to long-term outlook remains positive despite the potential for short-term volatility.
His view is that the US dollar remains one of the most important variables for gold.
When the dollar strengthens and Treasury yields rise, gold can come under pressure.
But when the dollar weakens, gold can quickly regain momentum.
The Fed has now delivered the hike
The Federal Reserve’s September 16 decision lifted the target range to 3.75%–4.00%.
The Fed said domestic spending has remained resilient, productivity growth is strong and capital investment is robust.
At the same time, it acknowledged that inflation remains elevated and said the latest policy action was intended to support a timelier return towards its 2% inflation goal.
That combination creates an interesting environment for gold.
Higher rates can support the dollar and increase bond yields.
But persistent inflation means that investors still have to consider the purchasing power of those dollars and the real return available from fixed income.
What happens next could matter more than today’s hike
The rate increase itself was widely anticipated by markets.
The bigger question for precious metals may therefore be what the Federal Reserve signals about the path ahead.
If the Fed indicates that further rate increases are likely, the US dollar and Treasury yields could come under renewed upward pressure.
That could produce another period of volatility for gold.
On the other hand, if markets begin to believe that the Fed’s tightening cycle will be limited, attention could quickly return to inflation, government debt and the longer-term purchasing power of the US dollar.
This is where gold’s role becomes particularly interesting.
Gold does not have to beat interest rates every day
Gold is often criticised because it does not pay interest.
That criticism misses part of the reason people own physical bullion.
Gold is not necessarily purchased to compete with a term deposit or government bond over a few months.
Physical gold can serve a different purpose: preserving purchasing power and providing an asset outside the liabilities of a financial institution or government.
This distinction becomes increasingly relevant when investors are concerned about inflation, currency depreciation, government debt or financial instability.
A stronger dollar could create a buying opportunity
Kuptsikevich has pointed out that gold has recently responded quickly when the US dollar has weakened.
In his view, the recent strengthening of the dollar and rising Treasury yields have weighed on gold, but when the dollar retreats, gold has been quick to respond.
That creates an important lesson for physical bullion buyers.
A falling gold price does not necessarily mean the fundamentals supporting gold have disappeared.
Sometimes the market is simply repricing the metal in response to changing currency and interest-rate expectations.
For someone accumulating physical bullion over many years, short-term volatility can look very different from the perspective of someone trading gold over the next few hours.
The debt problem hasn’t disappeared
Interest rates are ultimately only one part of the story.
Governments around the world continue to carry substantial levels of debt, and higher interest rates increase the cost of servicing that debt.
That creates a difficult balancing act for central banks.
Rates need to be high enough to contain inflation, but higher borrowing costs can also place greater pressure on governments, businesses and consumers.
This is one reason why gold investors continue to watch more than just the Federal Reserve’s interest-rate decision.
They are also watching:
- US government debt
- Treasury yields
- Inflation
- The US dollar
- Central bank gold purchases
- Geopolitical tensions
- Global monetary policy
- Currency purchasing power
- Physical demand for gold
A hawkish Fed does not change what gold actually is
One of the advantages of physical bullion is that its fundamental characteristics do not change because a central bank changes interest rates.
One ounce of gold remains one ounce of gold.
There is no corporate earnings forecast to revise and no promise of repayment from a borrower.
Its market price can rise and fall considerably, but the underlying physical asset remains.
That is an important distinction between price volatility and asset ownership.
The opportunity may come when sentiment turns negative
If the Fed remains more aggressive than expected, gold could certainly experience further short-term selling pressure.
Kuptsikevich has suggested that such a decline could potentially create more attractive conditions for longer-term buyers.
This is an important concept for anyone building a physical bullion holding.
Trying to identify the exact bottom of the gold market is extremely difficult.
Instead, many physical bullion buyers focus on gradually accumulating metal over time.
When prices rise, their existing holdings become more valuable.
When prices fall, their regular purchases acquire more ounces for the same amount of money.
Physical gold is a long-term decision
At FirstGold, we believe the conversation around gold should extend beyond today’s price.
Gold has been used as money and a store of value for thousands of years.
Today’s Federal Reserve decision is important.
Tomorrow’s decision will be important.
The next inflation number will be important.
But none of these events change the fundamental reason many people choose to hold physical bullion.
Gold is not bought because interest rates are going up or down today.
It is bought because people want to hold a tangible asset that exists outside the traditional financial system and cannot be created simply by pressing a button.
The FirstGold perspective
A hawkish Federal Reserve can certainly create short-term volatility for gold.
The September 16 rate increase has reinforced that reality.
But the longer-term gold story involves much more than the Federal Reserve’s overnight interest rate.
Inflation, government debt, currency purchasing power, central bank demand and investor confidence all remain part of the equation.
For physical bullion holders, a temporary price decline can therefore be viewed differently from a short-term trader.
Sometimes the most interesting buying opportunities appear when everyone else is worried about falling prices.
At FirstGold, our focus is physical bullion — gold, silver and platinum that you can accumulate over time and ultimately hold in your own hands.
Build wealth one gram at a time.
Disclaimer: This article is for general information only and is not financial advice. Gold and silver prices can rise and fall, and past performance is not indicative of future results.
