Rising interest rates and soaring bond yields present a serious headwind for gold short term, because the precious metal pays no income

With the Federal Reserve hiking its key interest rate the hardest in nearly three decades on Wednesday in the hope of cooling the worst inflation since the early 1980s, Adrian Ash – director of research at online precious metals platform BullionVault – comments on the impact and outlook for gold prices.

Rising interest rates and soaring bond yields present a serious headwind for gold short term, because the precious metal pays no income. But gold also carries no risk of default, and its solid performance in the first half of 2022 suggests that big-money investors are sticking with the metal as a form of insurance against the chaos hitting the rest of their portfolios.

Global stock markets have lost 16% from this time last year, while bond markets are down 17% and crypto-currencies have sunk by 45% or worse. Gold in contrast is currently trading unchanged from June 2021 in US Dollar terms, and it shows 10% gains for 2022 so far in both Euros and UK Pounds.

Outperforming other assets might seem a low hurdle right now, but the last time that longer-term interest rates rose sharply like this, driven by a plunge in bond prices as central banks began to tighten policy, the value of all the gold-above-ground crashed by $1 trillion inside two days.

For gold, the difference between 2013 and 2022’s surge in borrowing costs is the impact it’s having on other assets and the economy. Fears of stagflation, plus today’s awful geopolitical outlook and the sudden bear market in risk assets, all highlight gold’s appeal as portfolio insurance. While new inflows are currently far below the 2020 Covid peaks, there isn’t any sign of a rush out of bullion holdings or gold-backed ETF funds.