Interest rates break 5, gold crashes? Changjiang Securities wants to prove: Rate hikes may not necessarily be bearish for gold.

The market intuition of “interest rates above 5% will crash gold” may be a historical bias that needs to be tested. Changjiang Securities’ latest research report points out that this judgment is rooted in 20 years of investment experience in a low interest rate era. In the current historic combination of high debt and high interest rates, rising rates may actually continuously erode the fiscal credibility of the US dollar and structurally strengthen gold’s allocation value, rather than simply being bearish for gold. Gold’s pricing logic is shifting from “opportunity cost” to “credit substitution.”

From the data perspective, in 2025 US federal net interest expenditure will reach $970.1 billion, surpassing the roughly $900 billion defense budget, rising to 3.2% of GDP and 18.5% of fiscal revenue — both post-WWII records. Changjiang Securities analysts Wang Hetao and Ye Ruzhen point out in the report that this level not only exceeds the historical peak at the end of the Cold War in 1991, but has endogenous conditions for further worsening in both debt structure and interest rate path, marking the US’s entrance into a key threshold zone of sovereign credit risk exposure.

On market impact, the study cites nearly 60 years of data evidencing a switch in pricing logic: When the 10-year US Treasury yield is below 4.5%, rising rates indeed suppress gold prices. Once yields break and stay in a high range, the relationship reverses fundamentally. From 2022 to 2025, Treasury yields climbed from below 2% to the 5% range, while gold prices cumulatively rose by over 100%, hitting a historic high of $3,300 — the traditional “rate hikes bearish for gold” framework totally failed in this cycle.

Changjiang Securities maintains its core view of a bullish medium-term outlook for gold, recommending increased allocation on pullbacks, while noting that volatility in rate expectations may still pose short-term pressures on gold, though the medium-term logic is constantly reinforced.

The Inertia Trap: Boundaries of the “Real Interest Rate Framework”

The narrative of “higher interest rates are bearish for gold” does not arise out of nowhere; it has a solid historical foundation, but the time window is too narrow.

During the low interest rate era from 2008 to 2021, the 10-year yield mostly fluctuated between 0.5% and 3.5%, and “real interest rates” were the core variable for gold pricing. During the 2013 Taper Tantrum, yields rose from 1.6% to 3.0%, gold fell from $1,700 to $1,200; In the 2018 hiking cycle, yields rose from 2.3% to 3.2%, gold fell from $1,350 to $1,160. In low rate environments, the opportunity cost of holding no-yield gold was clear — a 3% risk-free Treasury yield offered a distinct substitute advantage over 0% gold interest.

However, since 2022 this logic has been systematically overturned. The Fed began aggressive rate hikes, and 10-year yields surged from below 2% to a peak of 5.02% in October 2023. According to traditional frameworks, this should be gold’s darkest hour. The actual result was exactly the opposite: gold prices rebounded from a low of $1,620 in November 2022 all the way to the 2025 historical high of $3,300.

Changjiang Securities extended the observation window to the past 60 years for more complete evidence.

In the Volcker era from the 1970s to early 1980s, yields remained high at 8%–15%; rolling 5-year correlation shows gold and interest rates were mostly positively correlated, reflecting the erosion of fiscal sustainability from high rates. From the mid-1980s to 2021, interest rates entered a multi-decade decline, turning the correlation negative; since 2022, with yields breaking above 4% and staying high, correlation turned positive again. The research concludes: The 4%–5% yield range is precisely the critical point between two pricing logics — below this, opportunity cost dominates; above, credit backlash logic takes over.

Three-Stage Debt Cycle: Unprecedented High Debt + High Rates Combination

Understanding the changing relationship between gold and interest rates across different rate ranges, debt is the key clue. Changjiang Securities divides the US debt cycle post-WWII into three phases.

Phase one (1950–1980): High rates + low debt. Yields were high but debt manageable, with interest-to-GDP held at a reasonable 2%–3%. The meaning of high rates was monetary tightening, not debt crisis signal.

Phase two (1990–2021): High debt + low rates. Debt kept rising, but rates declined, so low rates offset the interest burden; interest/GDP was dampened near 1.5%. This phase established market inertia for the “real rate framework.”

Current phase three (2022–now): High debt + high rates. Debt has breached 100% of GDP, and effective rates since 2022 have rapidly risen above 4.5%. High debt and high rates have resonated positively for the first time.

Changjiang Securities points out, this is an unprecedented historical configuration — both dimensions squeeze together and interest expense pressure multiplies exponentially. In this pattern, each unit of rate increase strengthens credit stress, not just reflects monetary policy stance. The transmission chain changes: Rate hike → surge in interest expenses → expanding fiscal deficit → faster debt stock growth → credit rating downgrade by agencies → weaker demand at Treasury auctions → foreign investors reduce holdings → dollar’s foundational credit shaken → gold upgrades from safe haven asset to credit substitute.

Credit Risk Threshold Zone: The 3.2% Historical Marker

Changjiang Securities, through systemic review of historical data for developed economies since WWII, identifies a critical threshold for interest expense/GDP: When it exceeds 2.5%, markets start to question fiscal sustainability; at 3.0%, rating agencies usually start downgrading or negative outlook; above 3.5%, substantial fiscal tightening or a reshaping of monetary credit typically follow.

Comparing historic benchmarks, the situation in 2025 is highly unique. At the end of WWII (1945), debt/GDP reached 104%, close to today, but the Fed capped long-term rates at 1.3% via yield curve control, so interest/GDP was just 1.36% — current Fed cannot replicate this.

At Volcker’s peak in 1981, effective rates reached 7.2%, but public debt was only 25% of GDP, so after inflation was tamed rates naturally fell, quickly alleviating interest burden. In 1991, interest/GDP rose to 3.16%, similar to 2025, but debt was only 44% of GDP, and the “peace dividend” from the end of the Cold War helped push interest/revenue down from 18% to below 10% over ten years.

2025 faces a radically different mix: effective rate at 3.2% (moderate), debt/GDP at 120% (massive), interest/GDP at 3.15%, interest/revenue at 18.53%, all at historic highs since WWII. More crucially, there are no historical outlets that previously worked: no rate suppression via yield curve control, no super-high growth to quickly reduce debt/GDP, no “peace dividend” providing fiscal consolidation space. Automatic rises in Social Security and Medicare make deficit cutting nearly impossible, and debt stock cannot realistically fall.

International comparison further highlights US unique vulnerability. Statistically, Italy’s interest/GDP (3.8%) is higher than the US (3.15%), so the US is not the country with the highest interest burden.

But Changjiang Securities notes, the US has unique risks in four dimensions: Growth, US interest/GDP nearly doubled in five years, much faster than comparable economies; debt structure, about 24% held by foreign investors, and China in the past five years sold about $400 billion in Treasuries, a 36.6% drop with no reversal sign; monetary policy, the Fed is trapped in a fiscal-dominant dilemma of “higher rates, worse fiscal; worse fiscal, more scared to raise rates”; credit ratings, S&P and Fitch already downgraded, Moody’s in 2024 switched outlook to negative, the US faces a historic crisis of losing all top-tier ratings.

Every 50 Basis Points Rate Rise: Fiscal Bill Adds Up Quickly

With $30.3 trillion in public debt in 2025, each 50bp rise in effective rates increases annualized interest expense by about $150 billion. Changjiang Securities’ sensitivity calculations show that if rates rise from the current 3.2% to 4.3% (just 100bp), interest expenses will expand from $970.1 billion to about $1.3 trillion, an increment equal to the annual GDP of a medium economy. If effective rates approach the 1990s average of 6%, interest expenses would near $1.82 trillion, about an 87% increase over now.

This is only static calculation. Dynamically, the roll-over effect in debt stock creates endogenous upward pressure for effective rates. In 2025, new bond issuance rates are already at 4.5%–5%. About 30% of existing debt matures and needs refinancing annually, so low-rate old bonds are steadily replaced by high-rate new bonds, raising the average rate. Changjiang Securities estimates that if new debt rates stay at 4.5%, even with no more Fed rate hikes, effective rates would automatically climb to about 4.1% in three years, raising interest expenses close to $1.3 trillion.

Looking at the 2025 federal budget structure, net interest expense is 13.8% of total expenditure, exceeding defense spending (about 12.9%), second only to mandatory spending (Social Security, Medicare etc., about 58.5%). Both mandatory spending and interest expense are “rigid expenses,” totaling over 70% of the budget, rapidly shrinking fiscal flexibility for policymakers.

Paradigm Shift: Bullish Medium-Term, Increase Allocation on Pullbacks

Summing up, Changjiang Securities concludes that the market’s linear extrapolation from low-rate era experience is essentially selective neglect of the full historical cycle.

On short-term pressures, the firm is clear: volatility in rate expectations and Fed policy uncertainties are only temporary negatives for gold and do not change the medium-term direction. The continuous rating downgrades from 2023–2025, foreign central bank dumping of Treasuries since 2024, and the 8.8% dollar trade-weighted depreciation since early 2025 are empirical signals of credit loosening transmission chain, not isolated events.

As for the medium-term logic, the Changjiang report writes: “The debt configuration is the product of decades of fiscal expansion, rigid welfare, monetary easing and geopolitical spending — with strong path dependence and irreversibility. Policy space for fiscal consolidation is extremely limited. The longer high rates persist, the higher debt roll-over costs, the faster interest/GDP surges, the more prominent sovereign credit weakening, and the more significant gold’s strategic value as a hedge against credit depreciation.”

Risk Disclosure and DisclaimerThe market has risks. Investment needs caution. This article does not constitute personal investment advice, nor does it consider individual users’ specific investment goals, financial status, or needs. Users should consider whether any opinions, views or conclusions in this article are suitable to their situation. Investing based on this article is at your own risk.