What Causes Precious Metal Prices to Go Up & Down?

The simplest explanation for why the price for anything goes up or down is “Supply and Demand”. We all know what that is at a basic level. Go to an auction and you see supply and demand at work at its’ most pure level. If more than one person desires to own the item being auctioned, you have more demand than supply: 2 bidders and 1 item. The price goes up. If you have only one bidder for an item, that person can usually name their price, assuming the seller is willing to sell at the named price. If you have no interested bidders, the auctioneer will immediately start lowering the opening bid in hopes of finding some lower price that will interest someone to buy.

So, if you have more interested buyers than you have stuff to sell, you can raise your prices until you find the most willing buyer. If you have more stuff to sell than you have interested buyers, you have to start lowering your price until to find someone willing to part with their cash.

There are several things that affect the price of metal. In our global economy, these things play out all across the planet every day.

Developing nations are currently increasing their demand for metals for two reasons: jewelry and industry. In places like India and China, we are seeing very fast increases in economic growth. While we lose American jobs to these nations because of the lower wages that are paid in these countries, the local citizens are seeing wage increases. They are moving up in the world, economically speaking, from where they were just a few years ago. That increase in income makes it possible to own things that they never dreamed of before. Things like cell phones and automobiles and televisions and fine jewelry. All of these items contain precious metals. As more people around the planet see their incomes increase, the demand for goods containing precious metals increases.

Economic uncertainty also creates increased demand for precious metals. This one is a little more subtle. The idea here is named by economists the “flight to safety”. The idea is that, when it comes to having money, people tend to trust forms of money have “intrinsic value”. Intrinsic value is when the actual thing that you are holding in your hand is valuable all by itself, without someone else, like the government, a bank, or a stock broker telling you it has value. A stock certificate, or a certificate of deposit, or even a dollar bill, only represents value. By itself it is just a piece of paper and has no intrinsic value. On the other hand, a loaf of bread or a piece of good wood or a car or an ounce of gold has value regardless. You can always find a buyer who needs a piece of wood or a loaf of bread or a car or an ounce of gold. Even if the economy is in the tank, people still need bread and wood and gold.

The “flight to safety” is the idea that when the economy looks bleak, people tend to trust their savings to things that have intrinsic value and abandon savings in things like stocks and bonds. Sometimes it as simple as taking your money out of the bank and putting it in your mattress: Some people fear that the bank will collapse and take their money with. A mattress won’t do that. Metals have always been a favorite place to invest in uncertain economic times. Metals have a large demand, they are easy to store, they have lots of value per pound of metal.

Supply of the metal is the final factor. Even if the demand for the metal is growing rapidly, there can not be an increase in price if the available supply of that metal is also increasing. If the production, by mining, of gold is increasing at the same rate as the demand, no price increase will occur. But supply rarely is in sync with demand. Increasing demand for gold can occur overnight: a poor economic forecast or a natural disaster can cause fear and people will call their broker and say “buy gold!” But it can take months or years for a mining company to buy more mining equipment or get the necessary permissions from governmental regulators to increase production. Mining for metals is a very environmentally unfriendly process. It takes a lot of toxic chemicals to leach the gold or platinum or palladium or copper out of the rock in which it is embedded. Those toxic chemicals need to be managed and a lot of scrutiny goes into the process long before any permissions are granted by society to allow mining to proceed.

At the moment, the demand for gold, palladium and platinum has never been higher. All of the factors support increased prices. Developing economies around the world increasing international demand; the sluggish US economy creating a flight to safety; and the increasing environmental controls around the world slowing to growth in production all lead to increasing prices.

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