How Does a Precious Metal Gain or Lose Value?

Supply and Demand

Precious metals are traded in financial markets all over the world. They include gold, silver, platinum and palladium. Gold is by far the most commonly traded precious metal followed by silver and platinum. Palladium is not traded as much as the other three. Precious metal prices fluctuate daily. The primary reason precious metals gain or lose value is supply and demand. If more people want to buy precious metals on the world financial markets, then prices rise. If fewer people want to buy precious metals prices fall.

Precious Metal Supply

There are many industrial and high-tech uses for precious metals. They are used in manufacturing and electronic components. Precious metals are also used to make coins, jewelry and other luxury items. When there is an increase in the use of precious metals for these purposes, the supply drys up. The rise of the middle class in China and India is increasing the production of jewelry made with precious metals. That is putting a strain on supply. Declining production in mines that produce precious metals also reduces supply. When precious metal supply declines, prices rise.

Precious Metal Demand

Precious metals are often seen as a safe haven for investment money during difficult economic times. Therefore, when the economy is struggling, precious metal prices rise. Factors that can make this happen include concerns about currency values, political instability, interest rate fluctuation and oil prices. There are consistent price spikes in precious metals whenever there is bad news in one of these areas. Consistently bad economic news drives long-term precious metal price gains. Prosperity and good economic news cause precious metal values to fall.

Investor Influence on Precious Metal Values

Fluctuations in precious metal values are often tempered by investor behavior. When precious metal prices rise, holders of precious metals often sell to cash in on profits. This causes prices to fall as more precious metals are released into the market. The reverse happens when precious metal prices are low. Investors hoping to take advantage of low prices buy up precious metals forcing values up. Emotion also plays a large roll in investor activity. A frenzy of buying or selling can force prices far beyond what is reasonable for the existing supply and demand. This has been seen many times in history. The emotional buying and selling of precious metals usually lasts a very short time. Market forces quickly take over returning prices to more justifiable levels.