Firstly, we need to understand what is causing the surge in gold prices before explaining how interest rates are affecting it. In the last two decades, Central Banks have been keeping global interest rates at 0-0.5%. This has helped many developing countries increase their GDP and economic growth and sparked inflation in developed economies by reducing their value through cheaper borrowing options.
This cycle of cheap borrowing seems to be coming to an end with current negative US bond rates and the recent rise in gold prices.
Millennials should take notice of this trend because it doesn't end here. Gold prices will go up after an economic slowdown, leading to a massive increase in interest rates that could become more volatile than it is today.
The primary mechanism of interest rates on the economy is through indirect effects that are usually negative. When interest rates go up, people will save more money and spend less, which leads to a decline in aggregate demand and less economic growth. This can have both positive and negative implications for our economy.
Positive: This applies to developed economies with negative economic growth figures. With an increase in interest rates, people will save more money, increasing the nation's savings rate. Hopefully, this will stop the country from accumulating more debt and help rebuild its economy through higher savings rates.
Neutral: This is the average effect of interest rates on economies. The main effects of interest rates are determined by the state of its economy at a particular time, which can be affected by many factors, not just interest rates. Other factors are more influential than interest rates, for example, a falling GDP and high unemployment.
Negative: The effects of higher interest rates are usually adverse on economies. For example, we have already seen this in emerging markets. Interest rates are currently at historic lows in Turkey and Brazil who have negative economic growth. This has led to fewer savings which are causing debt increases and the risk of defaulting on loans.
Interest rates affect our economy in many ways, but one way that is becoming more and more apparent is through the increasing gold prices. This trend shows that interest rates will start to rise soon, and it also shows how it can affect millennials who live in developing countries such as Turkey, Brazil or India.
As you can see, our economic system is coming to a point where gold prices will only continue to rise, which could potentially cause a financial crisis when interest rates increase dramatically.
Here are some interesting links to articles:
"Interest rates and gold" - Royal Mint
"The Effect of Fed Funds Rate Hikes on Gold" - Investopedia
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