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5 Factors That Affect the Global Price of Gold and Silver

Gold and silver are the two precious metals that attract most attention in the precious metals market. Both metals, which were used as currency in the previous centuries, have now become investment vehicles, presenting as worthy alternatives to stocks and bonds. Many investors now invest in gold and silver as a way of diversifying risk.

Though the prices of gold and silver are somewhat stable because both are hardly influenced by economic trends, they are the most complicated assets to price. Stocks, currencies, and other commodities mostly depend on fundamental data of the stock, the country, or physical demand and supply of the commodity. With these fundamental data, even an inexperienced investor can understand price movements in the stock market and other commodity markets.

However, pricing gold or silver on the basis of fundamental analysis is far more difficult because prices depend on many more factors than those that drive the prices of stocks and related commodities. As with those commodities, the price of gold is driven by supply and demand. However, unlike most other commodities, saving and disposal plays a larger role in affecting the price of gold and silver. The following paragraphs explain the various factors that influence the international prices of gold and silver.

5 Factors That Affect the International Price of Gold and Silver?

1. Hedge against financial stress

Precious metals like gold, silver, and platinum may be used to cushion the effects of inflation, deflation, or currency devaluation on a country’s economy. Ordinarily, when a country’s economy is plagued by any of these problems, the returns on bonds, equities, and real estate are used as hedge against the financial stress. However, if all these do not adequately compensate for risk and inflation, then the demand for gold and silver, and other alternative investments, increases. However, after the period of financial stress, the prices of gold and silver may fall again as conventional investments become more attractive.

2. Jewelry and industrial demand

Jewelry accounts for about 70 percent of annual gold demand. Similarly, a huge percentage of silver is utilized in the form of jewelry. Aside jewelry, both metals are also used industrially due to their high thermal and electrical conductivity properties as well as their high resistance to corrosion and bacterial colonization.

Whenever there is a rise in the global or local demand for gold and silver jewelry, there is a proportionate hike in the prices of both metals in the international market. Once demand falls again, the prices also go down.

3. Short selling

Gold and silver can be short sold in either physical markets or futures markets, and negative delta positions can be taken in many other derivatives. Short selling is an abusive practice of shorting stocks without first finding a source to borrow the stocks from. It is a practice that many believe often leads to the artificial suppression of the market.

Short selling is done by speculators who have no plans or ability to deliver their commodities, but intend on closing their position prior to the expiration of their contracts. According to many, abusive short selling centers around the London Bullion Market Association, the Federal Reserve System, banks like JP Morgan Chase and HSBC. For many years, observers of the gold and silver markets have noted that the prices of gold and silver fall artificially at the start of New York trading.

4. Gold and silver jewelry recycling

In recent years, the practice of recycling gold and silver jewelry has become so widespread that this alone has grown into a multi-billion dollar industry. Services that offer people cash in exchange for their old, broken, or mismatched gold jewelry are becoming more and more popular—both offline and online.

Gold and silver recycling affects the international prices of gold and silver, and this impact is felt more in places where this practice is more widespread. However, this is partly because many “buyers” of used gold take advantage of their customers by paying a fraction of what gold or silver is really worth.

5. Oil prices

Historically, oil has shown a strong correlation with gold and silver in terms of price. Since the 1960’s, the prices of gold and oil have a correlation of 0.8, while the prices of silver and oil have a correlation of 0.7.

Some have argued that strong correlation is due to the fact that the mining of gold and silver is an energy intensive process and hence as the oil prices fall, the prices of gold and silver would also rise or fall. However, this argument downplays many other significant factors.