What Moves The Precious Metals?

By Chris Dier-Scalise

Common knowledge says precious metals are safety investments. And we all know that the prices of gold, silver and platinum are roughly inversely correlated to the performance of riskier assets like stocks. But the value of precious metals is not determined solely by economic strife—if it were, they would all move together.

While gold has had steady upward momentum since May and is breaching prices not seen in six years, silver and platinum have only posted significant price increases in the past few weeks. Silver only broke out of its trading range on August 23 and is since up 15%. Platinum meanwhile didn’t breakout until August 28 and is since up 14%.

This lag has the market’s attention. The tricky thing for platinum is that—unlike silver—it’s expensive, sometimes more so than gold. Platinum futures are also not nearly as heavily traded, which means it moves will generally be either less pronounced than its yellow counterpart.

But getting back to the question here: What moves the precious metals markets? Well, similar to any market, it comes back to supply and demand.

Obviously, the job of extracting metals from the ground is done by mining corporations throughout the world. As the main source of new metals, their monthly, quarterly and annual output account for some of the supply-side equation. But this is a very small influence on the price of precious metals.

Because, while some of that material will go on to be processed into electrical conductors or other component technologies, much of the metal that will be (or ever has been) mined will simply be turned into bullion and bought and sold as an investment. This represents what is essentially the end product for these metals, and since that product never really changes or diminishes in any way, the absolute amount of gold, silver, and platinum never really goes down.

This supply of available precious metals exists in stockpiles held on marketplaces like the Chicago Mercantile Exchange, and therein lies the rest of the “supply” half of supply-and-demand. A glut in the stockpiles for silver and platinum are key reasons why they have underperformed other asset classes in recent years.

It’s these stockpiles of available precious metals that buyers and sellers are interested in. The demand that they show in a given metal relative to its total, stockpiled availability is ultimately what causes precious metal prices to fluctuate. Of course, the only reason to own precious metals is to store monetary value in something that won’t fundamentally change over time. And the only reason to do that is if there’s nowhere better for your money to grow (in something like, say, the stock market).

That brings us back to gold, silver, and platinum as safe investments and the speculative nature of futures trading. Because one of the primary marketplaces for precious metals is the futures market, and because precious metals are a known value sponge when leaner times strike, any sign of fear, anxiety, and uncertainty in other asset classes can create a short-term spike in demand (which can lead to a lower supply, which means higher prices, which means more speculation, which means more demand, etc.).

On the flip side, in an environment with stable asset classes, people will generally move away from the precious metals and into higher yield holdings. As a result, stockpiles increase, speculators lose interest and precious metals become that much less precious.

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