As with any other commodity, the price of gold is determined by demand and supply. Gold is known as the global currency of the last resort and the “barometer of fear.” This means that when people are worried about the economy, they turn to gold, increasing the demand and pushing the price up. The supply of gold is relatively stable, so it is mainly the demand side that affects the price of this precious metal.
The current price of gold per ounce is $1,210.10
Gold that can be traded on the market comes from three main sources: mining, recycling and central banks. Mining is a relatively stable source, and according to the World Gold Council, opening of new mines serves mainly to replace the old ones, without increasing the global supply. Recycled, or scrapped, gold is also more or less a constant, contributing around a quarter of the total supply. Finally, gold comes from central banks such as The Fed, who are the largest net sellers. Most central banks hold some of their reserves in gold. While the average figure is around 10%, the United States holds around 75% of its reserves in gold, according to the World Gold Council.
Gold has industrial and scientific use, accounting for around 10% of the global demand. Two-thirds of global supplies are used by the jewellery industry, with demand rising during periods of price stability or gradually rising prices. The main part of the demand side influencing the price of gold is investment. Investing in gold can mean buying physical gold or any of the gold-related investment products.
Inflation and Deflation
Prices go up when the supply of money is increased. More money in circulation makes it worth less. When that happens, people turn to hard assets such as gold, which don’t lose their value over time. Similarly, deflation–when prices go down–is a sign of falling levels of economic activity. This, again, makes people want to preserve their capital, and gold here makes a good option. In both cases–inflation and deflation–it is primarily the value of the U.S. dollar, more than any other currency, which determines the price of gold.
Gold and the Dollar
Because it is priced in dollars, gold is affected by the movement of the greenback. There are many reasons why the U.S. currency may change its value, but one thing is constant: when the dollar goes down, gold goes up and vice versa. This is because when the dollar is weak, gold becomes cheaper for investors holding other currencies. When they start buying gold, the price of it goes up. Also, the U.S. dollar is the main reserve currency in the world, so when it is weak, it prompts central banks to protect their holdings by selling dollars and buying gold. This again pushes the price of gold up and has a further negative effect on the dollar.
Silver is a precious metal used as a form of currency and an asset with intrinsic stored value. It also has industrial uses, which are growing in number. Silver prices are driven by a confluence of factors affecting short- and long-term supply and demand. As with any commodity, when supply increases relative to demand, prices fall. When demand increases relative to supply, prices increase. These effects are magnified by investor actions and expectations, although in the long run, macroeconomic and structural market forces have the greatest effect on silver prices.
The current price of silver per ounce is $16.10
Demand for silver continues to increase within the industrial sector, because silver is an efficient thermal and electrical conductor and also has useful characteristics stemming from its malleability, ductility and optical reflectivity. Silver is used in batteries, solar products, computers and smart phones. Further, many of these high technology products have short life cycles, quickly becoming obsolete and ending up in garbage dumps. Few efforts are made to recycle industrial silver, which helps prop up high demand. According to the Silver Institute, growth in demand for silver between 2013 and 2018 is expected to be 27%. New applications for silver continue to be found, and high demand from China also drives demand, which affects prices.
Relationship to Gold Prices
Demand for silver is driven by demand for gold. Gold is often used to diversify investment portfolios, due to its negative price correlation with major asset classes such as stocks and bonds. Gold is also a hedge on falling currency values. When the market for gold strengthens, ancillary demand spills over into the market for silver, resulting in rising prices.
Historically, precious metal investors have observed pricing ratios between gold and silver, and when they observe a perceived imbalance in the ratio, this can spur buying and selling of silver. When gold prices rise, investors expect the ratio to remain stable, which implies that silver prices must rise accordingly.
Institutional investors have commodity trading desks that can influence the price of silver and other commodities. Also, a group of huge trading concerns, such as Glencore, Trafigura and Louis-Dreyfus, can influence short-term prices, in particular, as they execute trading strategies involving huge amounts of silver.
The proliferation of exchange-traded funds has generally increased demand for silver. ETFs offer individual investors liquid, low-cost vehicles for tracking indexes, a passive investing strategy that is increasingly in favour. As silver ETFs take in more investor funds, they invest it in silver. Likewise, if investors decrease their investing in silver ETFs, this can result in short-term declines in silver prices.
Economic and Market Factors
Macroeconomic factors such as currency devaluations and inflation can spur demand in gold and silver. Both institutional and individual investors view gold and silver as safe stores of value relative to fiat currency, which derives its value from non-intrinsic sources such as government backing.
When the value of the U.S. dollar declines, silver’s price tends to rise. Silver supplies also affect price, and mining and production efforts are especially responsible for short- and medium-term price swings. Investors follow production closely; when it falls, investors speculate on price increases, and such speculation can cause the price to increase due to an increase in the short-term demand for silver contracts. In the medium term, lower production also decreases supply relative to demand, which further boosts prices. However, when prices rise, producers with higher production costs begin mining again at idle facilities, increasing supply and reversing the price increase.