Precious Metals are rare, naturally occurring metallic elements with high economic value. They are unusual in that they are both industrial elements and investments. Manufacturers use these metals to make electronic components, jewelry, dental equipment and catalytic converters among other things. Investors, on the other hand, collect coins and bars made out of precious metals.
This second use – as investments – makes precious metals the objects of intense speculation in commodity markets. Precious metals traders see these commodities as a form of money that holds its value better than printed paper money. Skeptics, however, argue that precious metals are simply rocks with little utility beyond their limited industrial uses. Ironically, the high premium placed on precious metals by traders makes them too expensive and impractical for most industrial applications.
Supply and Demand
Like all products and services, the laws of supply and demand also apply to precious metals. A shortage, surge in need or interruption in production will result in an increase in metals prices. Conversely, faster extraction through technological improvement or other factors could saturate the market and diminish their value.
Economic Instability
Market conditions including currency prices have a direct impact on metal prices. Precious metals are traditionally negatively correlated with the US dollar making them a useful hedging tool in times of economic instability. The same applies during political uncertainty and unexpected global events.
Regulation and Economic Decisions
nything that dilutes the value of a currency results in an increase in precious metal prices. This is the case with quantitative easing (printing additional money) and higher rates of inflation. As metals are considered an alternate investment to the cash rate provided by financial institutions, their value generally decreases when interest rates rise.
Industrial Output
The continual increase in industrial uses will have a positive impact on metal prices. Precious metals are being used in high performance applications such as electronics, energy and automotive related products. An increase of demand in these products and new applications will increase demand and precious metal prices.
Are Precious Metals a Good Investment?
Precious metals are a unique asset class as they have intrinsic value, provide protection against inflation and carry a safe-haven status. When judiciously utilised to diversify a portfolio, precious metals can reduce both volatility and risk.
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