How Does Supply and Demand Impact Purchasing Precious Metals?
Like all commodities, Precious Metals are influenced by supply and demand. Economics 101 tells us that the more in demand or more rare something is, the more it will cost.
Consider the graph below from analysts at ZeroHedge. The X-axis represents quantity. The Y-axis represents price. When demand or supply changes, it is referred to as a movement and is represented by the sloping curves. The intersection where demand meets supply determines price.
If there is a decrease in demand, the slope will move left and meet supply at a different, lower-priced intersection. Similarly, if there is an increase in supply, the slope will shift right at a different, lower-priced intersection.
Factors that affect the supply of Precious Metals
As limited, natural resources, Precious Metals like Gold, Silver, Platinum and Palladium are the epitome of rare. For example, only about 2,500 metric tons of Gold are produced each year.
What can increase the supply and decrease the cost:
- Improvements in mining technology
- New discoveries
What can decrease the supply and increase the cost:
- The closing of mines
- Government reserves buy more than they sell
- Increased demand
Factors that affect the demand for Precious Metals
The various uses of Precious Metals play a big part in their demand. More than half of mined Gold is used for jewelry, and the top Gold consumer is India. More than half of mined Silver is used in industry. What can increase the demand and increase the cost:
- Growing populations that place a cultural value on Precious Metals
- Technological innovations that increase usage
- Economic or global crises that drive people to seek stability
The inverse of these situations would likely decrease demand and decrease costs.
Why bullion and coin values go up when paper-contract prices go down.
Paper-contract prices of Gold, Silver, Platinum and Palladium on the futures market are not indicative of the supply and demand of these Precious Metals. As analysts at ZeroHedge demonstrate, the price of Gold and Silver in the Comex futures market dropped when demand for these metals actually increased, causing mints to suspend sales.
The reason for this discrepancy is that paper-claims to bullion are being sold through uncovered contracts (contracts that “promise to deliver Gold that the seller of the contract does not possess”). Basically, bullion banks and hedge funds play numbers games in the futures market to profit from driving prices down.
Watching the prices on the futures markets is not an accurate reflection of investor demand. You may see U.S. coin values have a higher premium when their spot price drops, as happened to the U.S. Mint’s Silver Eagles the summer of 2015.
U.S. coin values go up when they sell out. The U.S. Mint had to suspend sales of its 2015 Silver Eagles after selling out, causing an increase in premium.
To get a true idea of how and when Precious Metals are moving, sign up for APMEX Market Alerts through your account or check our Spot Price Charts to view the prices of Gold, Silver, Platinum or Palladium.
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Written to acquaint you with Precious Metals investing and all the ways APMEX helps you succeed. Read more