Understanding the Dynamics Behind Gold and Silver Prices

Gold and silver prices are always on the move. Silver.com, along with other top dealers, maintains an up-to-the-minute feed of the spot prices for both gold and silver, and the number can change in the blink of an eye.

But, why?

This page is your resource for answering that essential question. Here are the factors that influence gold and silver prices in both the US and abroad.

The Foundational Factors – Supply and Demand

Before we discuss the different factors affecting the prices of precious metals, it’s important to understand the lens from which to view these factors. All of the elements listed below affect either the supply or demand underlying the price of gold and silver.

In a broader sense, the supply of precious metals is related to both newly-mined metal and existing metal that has reentered the market. It is sometimes easy to get new gold and silver to the surface, and it is sometimes more difficult.

Likewise, existing investors may be looking to pick up some fiat currency and may gently (or not-so-gently) flood the market with their own pieces. Or, they may decide that it’s better to stand pat and keep what they have.

Conversely, demand is guided by more immediate consumer pressures. The causes of those pressures, either towards or away from buying gold and silver, are intrinsic to some of the factors below.

However, the most important thing to bear in mind is that these factors are merely drivers of supply or demand, and the price lies within the balance between those two elements.

Overall Economy

The most obvious reason for price fluctuations in gold or silver is the state of the economy as a whole. Here are the general rules:

• When the economy is good and running smoothly, people are more likely to remain faithful to their fiat currencies as a store of value.
• When the economy is bad, people are more likely to look at precious metals as vehicles for the preservation of their worth.

Now, if you ask ten economists about the current state of our economy, you’re likely to get ten different answers. Each expert weighs the measures of the overall economy differently, and there are a plethora of results that they can conceivably derive.

An easier way to consider the state of the economy is to look at your financial situation and the financial situations of those around you. If you feel as though things are getting worse for you, they are likely getting worse for everyone, and vice versa.

It’s not a perfect way to gauge and certainly has its drawbacks, but it’s not the worst way to get a rough estimate to tell which way the wind may be blowing for gold and silver.

Inflation

Although the relationship between inflation and the overall status of the economy is not perfectly correlated, there is nonetheless a strong bond between the value of each bit of legal tender in a fiat system and the health of its economy. Since precious metals and currencies are linked together themselves, inflation also has a connection with the price of precious metals.

Just to review, inflation refers to a decrease in the value of a currency. In real terms, it means that products that were available at one price now cost more to buy.

At the same time, wages very rarely adjust to account for the lost value. So, most of the populace watches their money not stretch as far anymore, and there aren’t as many affordable opportunities.

Thus, rising inflation tends to correlate with increases in the prices of precious metals. A weakening dollar pushes investors into more tangible options.

The price increases in the metals may also be a reflection of the overall inflation, too. Again – prices of all goods tend to rise during periods of inflation, and the spot prices of gold and silver are not immune to these increases.

Geopolitical concerns

Economies are the collective efforts of humans, and are subject, therefore, to the larger events and occurrences taking place. Unrest in certain areas causes uncertainty in the economies of the affected regions, but it can also cause turmoil within the foreign markets.

For one thing, the nation’s status as a player in the market for certain goods, including gold and silver, may cause increases or decreases in those products’ prices if the nation suddenly isn’t buying or selling anymore – or, conversely, is buying or selling much more than before.

However, the primary geopolitical concern for any commodity, including precious metals, is the ongoing availability and supply of the physical goods themselves. A country engaged in a civil war is unlikely to be mining or producing its precious metal exports as effectively, and the overall supply of the metal is constricted.

Conversely, a change in the political structure or government may pave the way for increased production and mining of the metal. With more products flooding the market, the price goes down because the overall demand hasn’t increased with the supply.

Commodity traders are nervous by nature, anyway, so it may not even require that an actual supply restriction or increase takes place before you see a change in the price. Mere concerns that something could happen often inspires these dealers to try and get out in front of the coming trend.

Remember – the current spot price is primarily derived from the futures contracts that are expiring the soonest in the market, so the price can move just because some guys got spooked one way or the other.

Future Outlook

However, the expiring futures contracts aren’t the only driver of the spot price. The futures contracts themselves – with expiration dates out from the current day – also play a part.

In this case, it’s more about considering whether the current trends are going to continue. For instance, gold has been trending upwards since 2000, but there’s no guarantee that the price is going to do so. Futures traders’ entire job is to try and read the tea leaves about what the future may hold for their chosen commodities.

No matter how they see things, there can be an element of self-fulfilling prophecy to it. In other words, if they think the gold price will continue to rise, then they buy more of it now – which pushes the price higher, and so forth.

Wrap-up

None of the factors above tell the complete story about how the prices of gold and silver fluctuate. However, the hope is that you now have a better understanding about the macroeconomic forces that directly affect how much you can get for that troy ounce you have in the sock drawer.