InvestorQ : How gold reacts to the Fed rates in short-term and long-term?
Mahima Roy made post

How gold reacts to the Fed rates in short-term and long-term?

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NISHA Nayak answered.
2 years ago
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If you’ll see history, gold reacts differently to the Fed rates in short term and long-term but as the circumstances got different, there’s no clear reaction observed in the long-run.

In the short term, Fed rates have an inverse relationship with gold. When there is a fall in fed rates, the overall interest rates fall too, bonds yield fall and the cost of overall funds fall down in the economy. When the opportunity cost for holding gold becomes negligible the increase in gold demand arises. Hence, major of the people prefer holding gold over holding bonds and as a result the price of gold rise. In the short term, we have witnessed a fall in rates leading to weakening of the dollar and strengthening of gold prices.

However, if the circumstantial evidence is looked up, there is no clarity about the relationship in the long-term. If you take a look at the seventies record- during that period, the interest rates in the US were extremely high and the trajectory was also high. However, from 1971 to 1979, the price of gold rose by over $800/oz. The main reason behind this was the geopolitical uncertainties prevailing.  Secondly, the period post the Lehman crisis in 2008, showed signs of an inverse relationship, as the rates were cut drastically and were brought close to zero. Hence, the exact relationship is not very clear over the long term as there are diverse signals.
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