Interest Rate Risk


Investing in gold and silver is like investing in any other type of investment whether it is real estate, stocks, bonds, mutual funds, commodities, etc. Each asset class can be affected by interest rates in different ways. Central banks influence interest rates by expanding or contracting the available money supply in response to inflation, deflation, economic policy of the nation, and world events. Throughout history, central banks such as the Federal Reserve in the USA or the Bank of Canada have caused asset classes to rise or fall in response to interest rate policy.

As for gold and silver, many factors influence the price of these investment grade commodities including the movement of interest rates. In times of slowly rising inflation when the general level of prices as measured by the CPI (consumer price index) is gradually growing at 1-2% per annum, central banks generally take a hands off approach and keep interest rates stable. However, during times of recession, they will take a soft approach to the economy, commonly referred to as a Dovish stance, and allow interest rates to fall in an attempt to stimulate borrowing and generate economic activity. Conversely, during an inflationary period where the economy is running too hot and prices are rising faster than the 2% target, central banks will take a Hawkish stance and aggressively increase rates to deter borrowing and slow down the economy so that it doesn't overheat.


So what does this all have to do with investing in gold and silver, you might ask? As you will learn elsewhere in this course, precious metals are an ideal hedge against inflation because they generally rise with the overall level of prices in the economy. In time of crisis, metals will often rise faster than the CPI providing an environment whereby your real purchasing power increases relative to everything else. The offset, of course, is that central banks will tend to raise rates to slow down overall inflation. Depending on the speed and the amount of interest rate increases, gold and silver prices will generally FALL as interest rates RISE. This is what is called an inverse relationship where prices and rates are negatively correlated, meaning they usually move in opposite directions. This rise in rates will usually have a calming effect on how much inflation protection will occur, so long as interest rates remain unstable.

Conversely, in a depressionary environment, the central banks will lower interest rates to cause a stimulative effect on the economy. Savvy investors looking for a better rate of return will engage in what is called the substitution effect where one asset class (interest-bearing investments paying lower rates of return) are substituted for asset classes that will grow in an environment being stimulated by price increases, which we call inflation. This move into gold and silver will cause their prices to rise as more investors bid up the prices due to supply / demand constraints. More people wanting to buy a product at a fixed price will tend to bid up the price until supply meets demand and all orders are filled.

So the lesson to learn from this lecture is that:

interest rates tend to move in opposite directions to precious metals prices.

It is therefore important to study the news, markets, and your central bank's interest rate policy to gain a better understanding of where your investment values will go next and which asset classes are near the bottom of their current cycle.

The following lectures will discuss several other types of risks to consider when choosing to invest in any financial product, including precious metals. To access any of these locked lectures, you will need to fully enrol in this course since we can't give away everything for free!

Remember, your first purchase of precious metals with us will see your entire course fee deducted from your shopping cart, so you really have nothing to lose. But you will gain the knowledge on how to properly protect your wealth with gold & silver once you do enrol now.

The following lectures will discuss several other types of risks to consider when choosing to invest in any financial product, including precious metals. To access any of these locked lectures, you will need to fully enrol in this course since we can't give away everything for free!

Remember, your first purchase of precious metals with us will see your entire course fee deducted from your shopping cart, so you really have nothing to lose. But you will gain the knowledge on how to properly protect your wealth with gold & silver once you do enrol now.

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