What is a Basis Point?
A basis point describes one-hundredth of a single percentage point. The difference between 0.25% and 0.30% is five basis points.
These are useful when a difference of less than one percent is significant, such as in Federal interest rates.
Originally, the word “basis” was applied to demonstrate the base change between two percentages or the difference between the two.
What are Basis Points Used For?
Changes of less than 1% in interest rates, bond yields, and the value of mutual funds can impact economies. Analysts and traders use basis points to remove ambiguity when discussing percentage changes when applying it to measure potential impact to financial instruments.
How do Basis Points Apply to Precious Metals?
The most common application of basis points is how they relate to the Federal interest rate.
Rising interest rates have a bullish impact on precious metals like gold and recent tightening cycles brought the price of gold to new highs in recent years.
The spot prices of gold and other precious metals are constantly in flux, but they rarely jump in great, sweeping changes. And yet changes of less than one percentage point can create tidal waves of economic uncertainty.
Basis points are helpful in describing these small fluctuations in interest rates and spot prices with a high degree of accuracy. If the live spot price of gold changes by 0.50%, it represents a change of 50 basis points, which is cause for selling or buying consideration.
