How does the economic principle of supply and demand influence the price of gold, silver, and other precious metals?

Of the many factors that affect the spot prices of precious metals at any one time, the law of supply and demand is by far one of the most important. This basic economic principle not only affects the price of gold, silver, and other metals, but also of virtually every good, service, and commodity available within a free marketplace.

Here’s what you need to know about how the law of supply and demand as it relates to the spot prices you pay for precious metals.

How Does the Law of Supply and Demand Work?

First, let’s review Economics 101 by answering the question: What is the law of supply and demand?

The law of supply and demand suggests that, in a market where prices are allowed to float freely, the price of any given commodity will be at the intersection of two mathematical curves, known as the supply curve and the demand curve.

In simpler terms, this means that the price of something is found at the intersection of what suppliers are willing to take and what buyers are willing to pay. Though this is a well-known economic principle, one interesting element of the law of supply and demand comes in its dynamic ability to communicate market data through the price mechanism.

Since both supply and demand play into the final price of a product, prices will shift when either one changes with respect to the other.

When supply increases and demand doesn’t, prices will naturally trend downward. If demand increases when supply doesn’t, the increased scarcity will place upward pressure on prices.

Changes on one side of the price mechanism will also tend to affect the other side. When prices rise due to increased demand, for example, an incentive is created for more supply to be produced, thus putting downward pressure on the price from the other side.

Over time, the interplay of these two economic forces produces the price range for any given commodity.

Effects of Supply and Demand on Precious Metals

The law of supply and demand acts on all precious metals, but it doesn’t act on all of them in exactly the same way. Because of their different uses, each one has slightly different forces acting on it. Below we’ve written brief explanations of how the law of supply and demand impacts the prices of each of the most common investment metals.

Gold

As the most popular commodity for precious metal investors, the primary demand pressure on gold comes from the investment market. Demand for gold typically increases when stock and currency markets post losses, as it’s seen by most investors as a safe, tangible store of value.

Gold’s use in jewelry and electronics can also affect the demand component of its price, but the swings are rarely as large as those caused by market downturns. Like all precious metals, gold has a finite supply. However, because mining output is fairly consistent year-to-year, the supply curve for gold is relatively stable.

Silver

Like gold, the mood of the investment market has a considerable impact on the price of silver. In the case of silver, though, there are other factors that play equally powerful roles. Silver has a wide range of industrial uses—more so than gold—from thermal conductors to antimicrobial coatings on medical equipment.

Silver production has also increased at a more steady rate over the past few years than gold, and the overall global supply is larger. As a result, the price of silver is considerably lower than that of gold, but it’s still an excellent store of value.

Platinum

Though extremely valuable and much scarcer than gold, the majority of the demand pressures on platinum prices are industrial rather than investment-related. All internal combustion vehicles use platinum in their catalytic converters, producing a steady demand for this metal in one of the world’s key markets.

Palladium

Very similar to platinum, palladium is often overlooked as an investment. However, it’s also an extremely valuable metal that is well worth looking into as a long-term store of value. Palladium, like platinum, tends to see most of its demand from industrial sectors. Thanks to its scarcity, supply remains fairly steady and doesn’t tend to exert downward pressure on prices through surpluses.

These are just a few examples of how supply and demand continue to affect the prices of metals. If you are planning to invest in precious metals, be sure to take current supply and demand trends into account.

Be sure to check out the other articles in this series to read about more key factors that impact precious metals prices:

  • Industrial Applications
  • Struggling Economies
  • Currency Devaluation
  • Federal Government
  • Inflation and Hyperinflation
  • ETFs
  • Geo-Political Unrest