Interest rates and its effect on Gold and precious metals

An interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. The assets borrowed could include cash, consumer goods, and large assets such as a vehicle or building.

In terms of borrowed money, the interest rate is typically applied to the principal, which is the amount of money lent. The interest rate is the cost of debt for the borrower and the rate of return for the lender.

So in other words, interest rates are the prices for holding or loaning money. Banks give out interest rates for saving money which attracts depositors. Banks also receive interest rates for each loan they give out with the deposited money.

Interest rates and Inflation

Lower interest rates mean a higher demand for loans from businesses and individuals. Each loan increases the money supply system and according to the quantity theory of money, (supply and demand), The growth of the money supply will mean an increase in inflation. So this means that lower interest rates will highen inflation and inversely, higher interest rates will equal to lower inflation.

As previously discussed, Interest rates have an effect on inflation and subsequently, this also affects gold and precious metals.

Gold and Precious metals

A precious metal is a term used for the classification of rare metals that have high economic value.  The value of these metals is driven by various factors like rarity and industrial uses. The most popular precious metals with investors are gold, platinum, and silver. Precious metals tend to do well when inflation rates are above interest rates, making it a store of value against loss of value in paper currencies. So as interest rates rise to combat inflation, Precious metals will also be affected as this means the prices of gold and other precious metals could fall.

As an investment, precious metals are sought after to diversify portfolios and as a store of value, particularly as a hedge against inflation and during times of financial uncertainty. The single most popular precious metal for investment purposes is gold, followed by silver but when interest rates rise and go beyond inflation rates, Gold and other precious metals will most likely drop in prices.

Conclusion

The rise of interest rates is more likely the attempt of the federal reserve to regulate inflation and thus affect cash holdings and investments of investors and businesses alike. But these changes will fight the rise of inflation and therefore, help consumers and investors in different aspects of business and spending plus assist them through higher savings interest rates. On the downside, higher interest rates mean higher prime rates, credit card rates and increase in the U.S. national debt and lower gold and precious metal prices.

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