Have you ever wondered about the return on investment in precious metals, particularly gold? If so, you’re probably already aware that no precious metal pays interest. There is no interest rate if you own it as a commodity or indirectly as a share of stock.
But, what is the relationship between gold and the going interest rate at any given time? Plus, why do you always hear people say that they have “earned” such-and-such an interest rate on their holdings of gold bullion? Finally, is it possible to calculate an estimated rate of return on any of the precious metals?
Here’s what we’ll take a look at:
- How does the price of gold respond to interest rates and the strength of the dollar?
- How do holders of precious metals, both silver, and gold, earn money on their assets?
- Is it possible to estimate, within reason, a rate-of-return on gold?
The Dollar, Gold, and Interest Rates
Some gold investors pay close attention to two things: the strength of the U.S. dollar and the interest rate. There has been lots of scholarly research into the relationship between these factors. What is the truth?
First, all you need to do to discover how gold and the dollar perform is to look at an overlaid chart. In most cases, when the dollar gains strength, the price of gold drops. The two are said to have an inverse relationship.
Likewise, you’ll often hear talk about interest rates also being an inverse indicator of gold prices, but that is not actually the case. Many studies have shown that while gold and interest rates do occasionally travel in opposite directions, they also rise and fall in tandem as well.
Earning a Return on Gold and Precious Metals
Like all other commodities, which is what precious metals really are, gold does not earn interest. Instead, holders of the metal make gains based on appreciation, much as someone might show a profit by holding real estate, diamonds, or fine wine. However, compared to assets that do pay interest, gold compares favorably, as noted below.
Investors who keep the bulk of their assets in gold do so for reasons other than interest rates. Many hold the metal because they believe that the world economy, or the national one for that matter, is about to take a dive.
Recent pandemic-related problems, supply-chain disturbances, the soaring price of oil, and international political conflict all point to a very positive near-term future for the price of gold, silver, and other precious metals.
What’s a Realistic ROI for Gold?
Between 1971 and 2019, people who held gold bullion enjoyed a rate of return of about 10.6 percent. That contrasts with U.S. stocks which returned about 11 percent during the same time frame, and bonds, which were not nearly as favorable, at six percent.
Keep in mind that most gold enthusiasts are not so interested in historical returns on the metal as they are in the future potential of the metal to appreciate significantly in value if the global economy goes into crisis mode or hits periods of significant turbulence.
If you simply want to calculate what you’d earn by investing $2,000 per year, for example, in gold bullion and assume it earns its historical return of 10.6 percent, use this calculator.
Here’s an example, using the $2,000 per year figure above. Then, assuming a 10.6 rate, begin with a zero balance, contribute the $2,000 in gold at the end of each year for the next ten years, and use the calculator to show your result of $33,654 by the end of the 10-year period.
While gold, silver, platinum, and palladium don’t pay interest, they are valuable assets that do tend to appreciate in value over time. This is especially true when the economy is in trouble and investors search for so-called “safe havens” for parking their capital.
Gold usually goes up when the dollar goes down in value, so the two are said to be inversely related. But even though many people believe that rising interest rates send gold down in value, there’s no long-term proof of that theory.
As far as ROI is concerned, it’s essential to understand that while the 48-year return on gold is about 10.6 percent and comparable to stocks, the yellow metal and the securities markets often trend in opposite directions.
That’s why so many people aim to balance their stock portfolios with precious metals, especially gold and silver.