What affects the price of precious metals?
Supply and demand
As with any product or service, a shortage of precious metals – or an increased need for them – makes them more valuable. For example, if a strike at a major silver mine interrupts production, silver prices could increase over the short term.
An improvement in mining equipment could have the opposite effect, speeding up production and saturating the market – which would drive prices down, assuming demand remains constant.
In times of economic and political instability, precious metals are traditionally viewed as safe havens due to their lasting value. We saw this theory in action in 2016, when Donald Trump’s election to the US presidency caused gold to rally as nervous investors flocked towards its haven status.
Precious metals have a huge range of industrial uses, including in the manufacture of automotive parts, medical devices, electronics and jewellery. What’s more, new applications are continuously being developed. As demand for these goods grows, so does the demand for precious metals.
Strength of the dollar
Given that precious metals are dollar-denominated, they are particularly susceptible to fluctuations in the value of the greenback. When the dollar falls, precious metals are a good place to store USD – meaning it is likely to push the price of precious metals higher.
Precious metals offer a desirable alternative for fixed-income investors, whose investments offer a lower yield when rates are slashed. As such, Fed decision-making may guide investors towards these safe-haven opportunities, but the Fed’s impact on precious metals shouldn’t be overstated. Of more importance is how rate announcements affect the dollar.
Precious metals generally perform better in a rising-inflation environment. This is because quantitative easing – or money-printing – dilutes the value of the currency in circulation, and makes it more expensive to buy assets which are viewed as a reliable store of value.