Interest rates

Want to know how increased interest rates affect commodity prices? Read on and find out..

High interest rates decrease commodity prices

High interest rates or increasing interest rates tend to reduce demand for carrying commodities. Here we list the three most important reasons why:

  • It will increase the incentive for extraction today rather than tomorrow.
  • High interest rates will also decrease companies’ desire to carry inventories (such as oil inventories held in tanks).
  • Finally, it will encourage investors to shift from commodities into bonds and t-bills, where average returns with increase.

In contrast, low or descreasing interest rates has the reverse effect. Not only will it lower the cost of carry, it will also tend to raise commodity prices.