Conventional market wisdom suggesting that gold prices must fall when interest rates exceed 5% may be a historical bias in need of re-examination.
A new research report argues this judgment is rooted in investment experience from the past two decades of low interest rates. In the current historic combination of high debt and high rates, rising interest rates may not necessarily be negative for gold. Instead, they could systematically enhance gold's allocation value by persistently eroding the fiscal credibility of the US dollar. The logic for pricing gold is shifting from "opportunity cost" to "credit substitution."
Key Thresholds in the Data
On the data front, the US federal net interest expense for 2025 has reached $970.1 billion, surpassing the approximately $900 billion defense budget. This represents 3.2% of GDP and 18.5% of fiscal revenue, with both metrics at post-World War II historical highs. The report notes this level not only exceeds the historical peak at the end of the Cold War in 1991 but also possesses endogenous conditions for further deterioration in debt structure and interest rate trajectory. This marks the US entering a critical threshold zone for sovereign credit risk exposure.
Shifting Market Dynamics
Regarding market impact, the study cites nearly 60 years of data to support the shift in pricing logic. When the 10-year US Treasury yield is below 4.5%, rising rates indeed exert a negative impact on gold prices. However, once rates break through and stabilize in a high range, the relationship fundamentally reverses. Between 2022 and 2025, Treasury yields climbed from below 2% to the 5% range, while gold prices accumulated gains of over 100% during the same period, ultimately reaching a historic high of $3,300. The traditional framework of "rate hikes being bearish for gold" completely failed within this cycle.
The report maintains a core view of being medium-term bullish on gold, advocating for increasing allocations on price dips. It also notes that short-term pressure on gold from interest rate expectation volatility remains a periodic disturbance, while the medium-term logic continues to strengthen.
The Limits of the "Real Rate Framework"
The narrative that "rising rates hurt gold" did not emerge from nowhere; it has a solid historical foundation, but the timeframe for that foundation is overly narrow.
During the low-interest era from 2008 to 2021, with the 10-year yield mostly fluctuating between 0.5% and 3.5%, "real interest rates" were the core variable for gold pricing. In the 2013 Taper Tantrum, yields rose from 1.6% to 3.0%, and gold fell from $1,700 to $1,200. During the 2018 rate hike cycle, yields rose from 2.3% to 3.2%, and gold fell from $1,350 to $1,160. In a low-rate environment, the opportunity cost of holding non-yielding gold was clear—a 3% risk-free Treasury yield presented a clear substitution advantage over gold's 0% yield.
However, since 2022, this logic has been systematically overturned. As the Federal Reserve began aggressive rate hikes, the 10-year yield climbed from below 2% to a peak of 5.02% in October 2023. According to the traditional framework, this should have been gold's darkest period. The actual result was the opposite: gold prices rebounded continuously from a low of $1,620 in November 2022, reaching a historic high of $3,300 by 2025.
Extending the observation window to nearly 60 years provides more complete evidence. During the Volcker era of the 1970s to early 1980s, with yields in a high range of 8% to 15%, a 5-year rolling correlation shows gold and interest rates were primarily positively correlated, reflecting high rates eroding fiscal sustainability. From the mid-1980s to 2021, as rates entered a long-term downward channel, the correlation systematically turned negative. Since 2022, as yields broke through 4% again and stabilized at high levels, the correlation has turned positive once more. The research concludes that the 4% to 5% interest rate range is the critical point for switching between these two pricing logics—below it, opportunity cost dominates; above it, the logic of credit backlash takes over.
A Three-Phase Debt Cycle
To understand the underlying logic of the changing relationship between gold and interest rates across different rate ranges, debt is the core clue. The report divides the US debt cycle since WWII into three phases.
Phase One (1950-1980) was high rates + low debt: interest rates were high but debt scale was relatively controllable. Interest expense as a percentage of GDP remained in a reasonable range of 2% to 3%. High rates signified monetary policy tightening, not a debt crisis signal.
Phase Two (1990-2021) was high debt + low rates: debt scale continued to climb, but interest rates trended lower long-term. Low rates partially offset the interest pressure from debt expansion, with interest expense/GDP suppressed to around 1.5% at one point. This phase established the market's investment inertia around the "real rate framework."
The current Phase Three (2022-present) is high debt + high rates: debt scale has exceeded 100% of GDP, and the effective interest rate has rapidly climbed above 4.5% since 2022. High debt and high rates are forming a positive resonance for the first time in history.
This represents an unprecedented historical configuration—two dimensions squeezing simultaneously, exponentially amplifying interest payment pressure. In this setup, each unit increase in interest rates strengthens credit pressure rather than merely reflecting monetary policy stance. The transmission chain for rising rates thus changes: rate hikes → soaring interest payments → widening fiscal deficit → accelerating debt stock growth → credit rating downgrades by agencies → weaker demand at Treasury auctions → foreign investor divestment → weakening of dollar credit foundation → gold upgrades from a safe-haven asset to a credit substitute.
The Credit Risk Threshold
Through a systematic review of historical data from major developed economies since WWII, a key threshold for interest expense as a percentage of GDP has been identified: when it exceeds 2.5%, the market begins to question fiscal sustainability; at 3.0%, rating agencies typically initiate downgrades or negative outlooks; exceeding 3.5% is often accompanied by significant fiscal tightening or monetary/credit restructuring.
Comparing historical key junctures, the 2025 position is highly unique. At the end of WWII in 1945, debt/GDP was similarly high at 104%, but the Fed forcibly suppressed long-term rates to around 1.3% via yield curve control, keeping interest/GDP at just 1.36%—an operation impossible to replicate today.
At the Volcker peak in 1981, the effective rate was as high as 7.2%, but public debt was only 25% of GDP. Once inflation was resolved, rates naturally fell, rapidly easing the interest burden. In 1991, interest/GDP reached 3.16%, matching 2025 levels, but debt was only 44% of GDP. The "peace dividend" following the Cold War's end drove the interest/revenue ratio down from 18% to below 10% over the next decade.
2025 faces a starkly different combination: a moderate effective rate of 3.2% superimposed on a massive debt/GDP of about 120%. Interest/GDP is 3.15%, and interest/revenue is 18.53%, both post-WWII highs. More critically, this situation lacks the historically effective exits—no yield curve control to suppress rates, no ultra-high economic growth sufficient to rapidly lower debt/GDP, and no "peace dividend" to create fiscal consolidation space. The automatic growth of Social Security and Medicare benefit spending makes deficit reduction nearly impossible, and a reduction in debt stock is almost unattainable.
International comparisons further highlight the US's unique vulnerability. Statically, Italy's interest/GDP (3.8%) is higher than the US's (3.15%), so the US is not the country with the heaviest interest burden.
However, the report points out that the US presents unique risks across four dimensions: In terms of growth rate, the US's interest/GDP has nearly doubled within five years, far faster than other comparable economies. In debt structure, about 24% is held by foreign investors, with China structurally selling about $400 billion in Treasuries over the past five years, a 36.6% reduction with no signs of reversal. Regarding monetary policy space, the Fed is trapped in a fiscal dominance dilemma: "the higher rates go, the worse the fiscal situation; the worse the fiscal situation, the more afraid they are to hike rates." On credit ratings, S&P and Fitch have already downgraded the US, and Moody's shifted its outlook to negative in 2024, putting the US at risk of a historic crisis of losing all top-tier ratings.
Rising Rates and the Fiscal Bill
With a public debt stock of $30.3 trillion in 2025, every 50 basis point increase in the effective interest rate adds approximately $150 billion to annualized interest expense. Sensitivity analysis shows that if the effective rate rises from the current 3.2% to 4.3% (a mere 100 basis points), interest expense would expand from $970.1 billion to about $1.3 trillion. This increment is equivalent to the annual GDP of a medium-sized economy. If the effective rate nears the 1990s average of 6%, interest expense would approach $1.82 trillion, an increase of about 87% from current levels.
This is merely static calculation. Dynamically, the rollover effect of the existing debt stock creates endogenous upward pressure on the effective rate. New debt issued in 2025 already carries rates of 4.5% to 5%, while about 30% of the debt structure matures annually and requires refinancing. As low-interest存量 debt is gradually replaced with higher-interest new debt, the weighted average rate is continuously pulled higher. Estimates suggest that assuming new debt issuance rates remain at 4.5%, even without further Fed hikes, the effective rate would automatically climb to about 4.1% within three years, pushing interest expense close to $1.3 trillion.
From the perspective of the 2025 federal budget structure, net interest expense already accounts for 13.8% of total spending, exceeding defense spending (about 12.9%) and second only to mandatory spending (Social Security, Medicare, etc., at about 58.5%). Both mandatory spending and interest expense are "rigid expenditures," together accounting for over 70% of the budget, drastically narrowing the fiscal maneuvering room available to policymakers.
A Change in Paradigm
Synthesizing the above analysis, the report concludes that the current market's linear extrapolation based on low-rate era experience essentially represents a selective neglect of the complete historical cycle.
Regarding short-term pressures, the stance is clear: the negative impact on gold from interest rate expectation volatility and Fed policy path uncertainty is periodic and does not alter the medium-term direction. Consecutive rating downgrades from 2023 to 2025, foreign central bank减持 of US Treasuries since 2024, and an 8.8% depreciation in the trade-weighted US dollar since early 2025 are all empirical signals of the credit loosening transmission chain, not isolated events.
On the medium-term logic, the report states: "The debt格局 is the cumulative result of decades of fiscal expansion, rigid福利, monetary easing, and geopolitical spending, exhibiting极强的 path dependency and irreversibility, with extremely narrow policy space for fiscal consolidation. The longer high rates are maintained, the heavier the rollover cost of存量 debt, the faster the climb in interest支出/GDP, the more significant the sovereign credit loosening, and the more prominent the strategic allocation value of gold in对抗 credit depreciation."
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