How Inflation and Market Conditions Affect Silver and Gold Prices
- Inflation leads to less buying power for currency, driving many to invest in Gold.
- Rising interest rates can present a challenge for the price of Precious Metals.
- Many seek a safe haven in Precious Metals when the global economy is in turmoil.
Inflation and other market conditions influence the values associated with all commodities, but Precious Metal prices are affected differently than most. Even though Gold, Silver, Platinum and Palladium have open market valuations that are dollar-denominated, the asking price at any given moment can change because of inflation, changes to interest rates, global trade relations and even the automobile industry. Unlike many other commodities that can be grown or manufactured, Precious Metals have finite supply levels, with production outputs that cannot always be increased in tandem with demand. Over time, however, economists have come to observe the typical ways the Precious Metals market reacts to outside influencers, so investors can gain a solid understanding of what to expect under certain circumstances.
Inflation and Precious Metals Prices
When prices increase on goods and services, currency loses its buying power. This weakening of money value is called inflation, which occurs naturally in an open market over time and affects the ability of the dollar someone earns today to buy the expected amount of goods tomorrow. In theory, when prices increase, people will demand higher wages and the cost of living stays in balance. We know, however, this does not always happen.
Gold, Silver and other Precious Metals are not affected by inflation in the same way as food or personal services. Precious Metals have both symbolic and industrial value and cannot be printed at will like paper money. Gold has a long history as a sign of wealth. The electronics manufacturing industry relies heavily on all Precious Metals as some of the best conductors in the world. Their supply will always be limited and therefore will retain some value as a scarce commodity, even when the manufacturing industry is in a slump.
When inflation rates are high, the value of printed currency weakens, which can lead to sluggish retail sales and declines in the stock market. When stocks are plummeting, people turn to Precious Metals as a low-risk investment because they are always in limited supply and have a habit of retaining more of their value. The more people turn to Gold and Silver as a safe-haven asset, the smaller the supply gets, which leads to even higher trading prices for these metals. Therefore, although it takes more money to buy an ounce of Gold, you now own a commodity that is increasing in value, rather than declining like stocks or bonds.
Interest Rates and the Precious Metals Market
Some governments try to offset high levels of inflation by increasing interest rates at their central banks. This cash flow works in the short term because it increases bond yields and encourages people to save more money. In the long run, however, your currency still does not have the buying power it once held. U.S. interest rate hikes from the Federal Reserve tend to put pressure on Precious Metals, driving those who seek safe-haven investments to the short-term gains found in bonds. Interest rates cannot climb forever, though, which is why those looking for long-term holdings frequently diversify with Gold and Silver investments. These metals have been a way to store wealth for thousands of years, with a history of appeal that has lasted longer than any central bank.
Gold and Global Trade Relations
When trade relations between major economic powers are tense, many economists fear markets could be negatively impacted. For example, when the United States adds tariffs against the exports of another county, the impact on manufacturing and retail sales can be hard to forecast. If fewer raw materials can be imported, companies may not be able to produce enough products to meet consumer demand. Trade wars can also lead to outright blocks of goods in and out of individual countries, which can negatively impact entire regions. Precious Metals are a popular investment during times of uncertainty because they are almost always in demand. The jewelry industry uses Gold, Silver and Platinum, and all Precious Metals are among the components of computers and small electronics. Sovereign governments are also among the biggest consumers of bullion, using them to strike commemorative coins and build up the wealth of their central banks.
Platinum and the Automobile Industry
For decades, car and truck manufacturers have been one of the top consumers of Platinum and Palladium. They are essential components of fuel cell vehicles, necessary for making catalytic converters that reduce carbon dioxide emissions. Recent changes in the automobile industry have affected Precious Metals prices, as many companies announce plans to transition to electric motors that do not need catalysts. However, there is no shortage of diesel trucks still on the road today, and early concerns about a swift change have not yet come to fruition. Increased interest in cars powered by natural gas has also given a boost to Platinum and Palladium values since they are two of the most effective materials for keeping emissions low.
