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What Factors Affect Gold & Silver Prices?

The gold price constantly changes due to many factors, including political decisions, economic conditions and financial problems that may occur around the world. Historically, investing in gold was seen as an attractive venture, not only for the potential returns but also as a safe haven in times of crisis or difficulty.

Postal Bullion’s senior gold dealer Michael Powton explains what factors affect the price of gold below as part of a series of articles to help educate potential investors.

The Main Factors That Affect Gold Prices

1. The United States Economy
The first factor that governs the gold price today is the United States Dollar. A stronger U.S. dollar will keep the gold prices stable, and low. A weak dollar will set the price of gold spiralling to a very high price. The U.S. economy plays a major role in the development of macroeconomics around the world. A strong dollar means that people are more confident in investing, buying and trading in dollars. However, lately, the U.S. economy has suffered. The dollar has not remained as powerful and promising than ever, which is why people and nations start investing and hoarding bullion.

Higher reserves of gold bolster the national economy and serve as a hedge against inflation. In recent decades, whenever people feel that the dollar is performing poorly in the world and the stock markets, they begin to invest in gold funds or gold coins. The demand for gold increases as bullion is bound to deliver more value for money. As with all other commodities, gold is also dependent on demand and supply.

2. The Demand For Jewellery In Asian And Chinese Markets
The largest purchases of bullion are reflected in the Indian and Chinese jewellery markets. In 2002, Chinese citizens were granted the right to buy ingots for the first time since 1949. This sparked a huge demand for bullion, which then affected the price of bullion across the world. In 2009, during the worldwide economic crisis, a record 32% drop in demand for gold jewellery was recorded, which resulted in a slight decrease in gold currency.

3. Bank Reserves
Central banks keep ingots in reserve as a buffer against inflation. Other monetary policies of central banks also have an impact on the price of gold. Falling interest rates may discourage investment in paper money, and alternatively investors buy gold with the expectation of better returns. If central banks give high interest rates, the chances are that the price of ingots will fall.

4. Gold Production
Due to the rising cost of production in the gold mines, strikes by gold miners, worsening political situations, the sharp increase in oil prices after the Iraq war and various acts of terrorism, gold mines have been less productive over the past 5 years.

5. Increased Investment In Gold
The world population is increasing, and so is the demand for gold. Through the ages man has seen the value in investing in bullion. Thus, the price of gold is also affected by the natural desire of man to buy gold, and to hoard it. Investment in gold may be via the physical, e.g. coins, jewellery and bars, to paper investments such as certificates, mining company stocks, accounts, spread betting, derivatives, Exchange Traded Funds and Contracts for Difference.

 

The Main Factors Affecting Silver Prices

Silver has thousands of industrial applications and and is considered as a store of wealth by investors. Silver is rare, malleable, antibacterial, aesthetically pleasing, lustrous and resilient in resisting corrosion.

1. Gold Price
The silver price is primarily driven by the price of gold. The demand for gold also increases interest in most precious metals, therefore speculative interest leads to a rise in demand for silver as an investment. As the silver market is comparably smaller in comparison to gold, silver price therefore rises more rapidly. Conversely, the silver price also falls more rapidly if investors lose confidence in the market. Trend analysis shows that silver prices tend to mirror that of gold.

2. Institutional And Private Investors
Market prices are affected by the purchasing power of large investors, who have accumulated over 300 million ounces of silver over the last fifteen years. Silver trades in a smaller market with a highly industrial demand. Interest in silver as an investment has increased during the financial crisis, as a buffer against market risk and portfolio diversity.

3. Industrial Demand
Industrial demand for silver may increase due to exploration of new applications in technology, such as microcircuits, batteries and superconductors. The growing wealth in developing economies may lead to an increase in Western style consumer consumption, which may also lead to a rise in industrial use over the longer term. The growing interest in EFTs from retail investors also explains the increasing demand for physical bullion.

4. Oil Prices
Historically, the correlation between gold and silver has been strong, and the relationship between gold and silver seems to be stable. It might therefore be logical to conclude that the relationship between silver and oil should be stable also. It has been posited that the process of silver mining is energy intensive, and therefore, as the price of oil falls or rises, so should the price of silver. This may be seen as simplifying the subject, as it overlooks other relevant factors. Another view is that the correlation between oil and silver should have be of greater importance, as they are both industrial elements, and the same common factors would affect their demand, but this assumption does not acknowledge that unlike oil, silver is not a perishable commodity.

If you have any questions about investing in gold, contact Michael Powton at Postal Bullion via email at help@postalbullion.com or call 0845 259 1925.