In theory, when interest rates rise gold prices should fall, but a closer look at historical data shows that this is not the case. Yes, the short-term reaction of the gold price to higher interest rates, specifically US interest rates, is to go in the opposite direction, but that only lasts for a short period of time.
Once this first dip is over, gold prices adjust to move in sync with interest rates. Over the decades, gold prices were at their highest during periods of high inflation and their lowest during periods of low interest rates. The latest reading for the US September consumer price index at 8.2% shows that inflation remains high, despite the Fed’s rate hikes so far, and means that the Fed will have little choice but to continue raising rates at its next meeting in three weeks’ time. Conservative estimates place rates at between 4.75% and 5% by early next year.
Demand for physical gold
Where gold and inflation differ is physical supply and demand. When markets are unstable and when geopolitics reach fever pitch as they have now, demand for physical gold tends to pick up. All the main buying regions, the US, Europe, India and China have their own dynamics.In Europe and the US retail investors favour not only financial instruments like gold ETFs but also the old-fashioned feel of the actual gold. At times of crisis, like now with the war in Ukraine and with the fractious economic policy in the UK, gold coin and bar sales tend to shoot up. Anecdotal evidence of that is that the UK’s Royal Mint has pocketed record profits in the last year as demand for coins and luxury collectables reached record highs. Also, the highest ever number of investors used physical gold to hedge their investments in the last twelve months lifting the Royal Mint’s pre-tax profits up by nearly 50% on the year.
India is another massive buyer of physical gold, not only for weddings and big family occasions but also ahead of any large festival such as the upcoming Diwali. If anybody has any doubts about that check the Dubai newspaper headlines which read: “How much gold can you legally carry to India?” The current run on Dubai gold two weeks before Diwali is happening because local prices are 12-15% cheaper than in India.
China is also going through a period of gold demand revival with imports of gold into the country rising to a four-year high. According to Bloomberg, purchases collapsed during the pandemic but since then they came back with a boom and the country’s imports have not yet managed to catch up with rising demand.
Gold in Shanghai is trading at a premium of $43 an ounce over the London price as domestic demand continues to rise. Imports into the country have been restricted by government policy which allows only accredited banks to import quotas set by the People’s Bank of China but these quotas are expected to be lifted in October.
With this level of demand for gold in India and China it will be hard for US and European prices to remain low for any sustained period of time, even if Fed interest rates cause some dips going forward.
WisdomTree Gold ETFs
| Product Name | ISIN | Exchange Ticker | Listing Currency |
| WisdomTree Core Physical Gold Hargreaves Lansdown | Interactive Investor | EQi |
JE00BN2CJ301 | WGLD | USD |
| WisdomTree Physical Gold – GBP Daily Hedged Hargreaves Lansdown | Interactive Investor | Charles Stanley Direct | EQi |
JE00B7VG2M16 | GBSP | GBP |
| WisdomTree Gold 1x Daily Short Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B24DKC09 | SBUL | USD |
| WisdomTree Gold 2x Daily Leveraged Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B2NFTL95 | LBUL | USD |
| WisdomTree Gold 3x Daily Leveraged Hargreaves Lansdown | Interactive Investor | EQi |
IE00B8HGT870 | 3GOL | USD |
| WisdomTree Gold 3x Daily Short Hargreaves Lansdown | Interactive Investor | EQi |
IE00B6X4BP29 | 3GOS | USD |
