Factors Influencing Gold and Silver Prices

Posted on April 17, 2024

Gold and silver prices are always in flux. They can move in meaningful ways in a matter of minutes.

However, as a smart precious metals investor, you must understand why those movements are taking place. So, the guide below talks about all the factors that can influence the price of gold or silver.

The Underlying Principle – Supply and Demand

Though we are going to go through each of the primary drivers of change in gold and silver prices in a moment, it’s important to frame how you view each of these factors. At the end of the day, the interplay between the number of buyers and sellers generates the prices.

On the supply side, gold and silver are affected by how much of each metal is mined AND how much-existing metal has re-entered the market. Because gold and, to a lesser extent, silver cannot spoil, the same pieces can likely stay in human control for thousands of years.

As a result, there is always a question about how easy it is to create access to gold and silver, be they newly mined or pieces already on the earth’s surface. At various times, these can be easy or quite difficult to find.

On the other hand, demand is more immediately a function of the number of buyers in the market and their aggregate needs. In a sense, demand is the more personal measure, so it is more vulnerable to external and internal factors than supply.

Here are the general rules about supply and demand, though:

When supply decreases and/or demand increases, prices go up.

When supply increases and/or demand decreases, prices go down.

Now that we’ve refreshed ourselves about supply and demand, let’s dive into the specific factors affecting gold and silver prices.

The Economy

Because gold and silver are so closely tied to currencies and the money supply, their prices are affected in no small amount by the state of the economy. The ebb and flow of the country’s economic health generates specific reactions from the populace about precious metals and fiat currency.

In short, when things are going well, people are less inclined to turn to precious metals like gold and silver as repositories of value. A churning economy is usually accompanied by a strong currency and a corresponding confidence in the currency within the public.

When things are going poorly in the economy, however, members of the public are far less inclined to stick it out with fiat currencies. A shaky financial view leads more people to seek out gold and silver to preserve the value of their wealth as best they can.

Both situations are related to the demand for precious metals. Good economies tend to lower demand and, all else being equal, lower gold and silver prices. Bad economic conditions usually have the opposite effect and push both demand and prices higher.

Now, we’re not asking anyone to become an economist here. Finding agreement about the state of the economy between trained economists is a fool’s errand, and everyone else is too busy to give it much time.

However, if you’re trying to read about the economy for clues about how to structure your precious metals investing, consider your financial situation and performance over the last few years. Unless you are one of a select few, your trajectory likely follows that of many others and the economy, and you can get a decent idea about what to do.

Inflation

We didn’t mention one key element of an economy’s health because it deserves its section as an influencing factor. There’s no question that inflationary pressures have a noticeable effect on the prices of precious metals like gold and silver.

Inflation, if you’ve never defined it, is a reduction in the value or buying power of a currency. Because the currency is worth less, product and service prices escalate to compensate for the weakening.

Thus, as in the situation above with a poor economy, the prices of gold and silver tend to rise as the inflation rate rises. Each new dollar printed by the government dilutes the value of each dollar in circulation because the overall value of the dollar is finite. So, the same amount of gold and silver may also cost more simply because the fiat currency is worth less, and it takes more dollars (or other currency) to buy now.

War or conflict

Political or geopolitical unrest can have a profound impact on the entire world and most of the products in it. Gold and silver are not immune to this phenomenon. Depending on the facts of the conflict, both supply and demand may be affected adversely by hostilities.

Unrest in a gold or silver-producing region may have the effect of lowering the supply of gold and silver to the world market. Supply can decrease because the number of available workers declines and/or top mining locations fall under the control of bad actors. Gold and silver mines are primary strategic targets for most participants in a war.

At the same time, there may also be an increase in demand for both metals – particularly silver – for their use in industrial and military applications during war. Shortages of goods are common in these times due to the macro need for them in the furtherance of a military or key producer’s support of the war machine.

Although rarer, it is possible that unrest can ultimately lead to an increase in supply. If a new regime or government assumes power with different priorities or agendas, prior restrictions on mining and commerce may be relaxed or eliminated. Thus, more gold and silver begin moving onto the market, and the price goes down.

How the future looks

A final element of price change within precious metals is more subjective. Since spot prices are a function of the value of expiring futures contracts, traders and investors are always looking ahead at the other contracts to find patterns or trends.

BGASC believes that the value of silver and gold will continue to increase in the coming years. Inflation and doubts about the health of the economy – to say nothing of geopolitical concerns – are likely to spur a growing number of people to look for options within precious metals.

Of course, no one can see into the future, and pathways don’t continue in the same direction. With notable national elections every two years in the US, there is always a chance that things will get worse or better for gold and silver.

However, because gold and silver never go bad, you can rest assured that the value of your portfolio is more secure and diverse with precious metals as a part of it.