Due to the general uncertainty and unreliability of the stock exchange market, people are now turning to other ways of investment—especially investment in commodities and precious stones.
Gold and silver are perfect stores of wealth that people have tested and trusted over the years. The fact that both metals are imperishable and scarce makes them a highly sought-after asset for investors. However, to be able to fully understand the gold and silver investment market, you have to fully understand how the values of gold and silver are calculated. Several factors determine the value and prices of gold and silver. And some of them are explained here.
8 Factors That Determine the Value of Gold and Silver
1. The value of currency
The fate of a strong currency like the dollar can force up or push down the value of gold and silver. If it is perceived that the value of such currency would drop, people would start to lose fate in it and would instead turn to investing in gold and silver as well as other valuable commodities.
2. Demand and supply
Gold and silver also respond to the regular market forces of demand and supply. When there is an increase in the demand for gold and silver, the prices automatically rise in response to the demand. Similarly, when there is a low level of demand, the prices automatically go down to in line with the reduction in demand.
3. Central bank reserves
Central banks keep gold and silver in their reserves as security. Central banks also play a very significant role in determining the value and spot prices of gold and silver. If central banks suddenly decide to sell off some of their reserves, there would be a sudden decrease in the prices and value of gold and silver. On the other hand, if the central banks decide to increase their reserves by buying more gold instead, there would be an increase in prices and value instead.
5. Interest rate
Another factor that goes into the determination of the prices and value of gold and silver is the current interest rate. When the interest rate is high, investors value assets like stocks, cash deposits, and other fixed income instruments. But when there is a reduction in interest rate, investors begin to favor other non-paper assets like gold and silver, which would automatically force up the demand and eventually the prices of such assets.
Inflation also plays a role in determining the value and prices of most physical and non-physical assets. If there is an expectation of inflation, there would be a rush to store up on assets like gold and silver, which are believed to be of strong value and less submissive to inflationary pressure. It is believed that even though currency may experience a reduction in its purchasing power, the purchasing power of gold and silver is likely to remain the same or even increase. Therefore, investors prefer to hold gold and silver as investment instead of cash because inflation would automatically force down the purchasing power of cash.
6. Increase in prices of gold and silver
In the investment market, gold and silver are like siblings. Once there is an increase in the price of gold an increase in the price of silver should be expected—and vice versa. This also happens with demand; an increase in demand of silver would result in a corresponding increase in the prices of gold, and vice versa.
7. Major world economies
The state of the economy of world’s most powerful economies such as those of the USA, France, Russia, or UK would also have a significant effect on the value and prices of gold and silver.
8. The manufacturing industry
Silver is not just some fancy precious metal; it is also an essential ingredient used in manufacturing a wide range of equipment and gadgets. It is used in the production of electronics, automobiles, and medical equipment. So, when there is an increase in demand for those items manufactured from silver, there would be a corresponding increase in the demand for silver which would also automatically lead to an increase in prices of gold.
These are the major factors that determine the prices and value of gold and silver. If you want to know what your gold and silver collections are worth specifically, there are many online tools that could help you determine the values. In conclusion, it is important that to ensure that you are always careful when investing in gold and silver. Ensure that you deal only with reputable brokers to avoid cases of fraud.