A messy pile of silver bullion coins

5 Factors That Can Determine the Price of Bullion

When you invest, it pays to understand the asset you’re buying. What influences asset prices? What are the warning signs that prices might be peaking or set for a decline? How do you identify good opportunities to buy?

It’s no easy task reading the market, but if you’re trying to make money selling bullion or you want to invest in it for the long term, there are broader market trends that affect the price of gold bullion, silver, platinum, and palladium. These are five factors that influence the price of bullion. Watching them can help you make better decisions about investing in gold and silver.

#1 Inflation: How to Maintain Your Wealth Against Rising Prices

One of the most important influences on gold bullion prices is inflation. High inflation has historically resulted in higher gold prices at both the global and local levels.

Gold has long been used as a hedge against inflation. In other words, when investors see fiat currency losing value or inflation rates outpace the interest provided by bonds, they bet on another asset to avoid taking a loss.

However, they may also want that asset to act as a safe haven. Gold is one option that meets this criterion, a quality that can be credited to its longstanding role in the money supply.

Until very recently in human history, paper currencies were backed by the gold standard. The gold standard allowed people to redeem their U.S. dollars for gold at a fixed rate. The gold standard ended completely in 1971 when the United States went off it to curb pressure from foreign nations redeeming U.S. dollars for gold.

While the gold standard ended 50 years ago, gold underpinned economic exchange for thousands of years before that. Many investors still see the precious metal as “real money,” and they turn to gold and silver when either the U.S. dollar or the currency in their own country faces inflationary pressure.

With inflation in Canada putting so much pressure on people’s savings, upward pressure for precious metals has been building. The future of gold and silver prices will undoubtedly be impacted by the direction inflation takes in the coming months and years.

#2 Global Growth and Demand: The Commodity Supercycle

One factor that can affect gold bullion prices is the commodities market, in particular, a phenomenon known as the commodity supercycle. The economy tends to be cyclical, with cycles of boom and bust lasting on average five and a half years. During these cycles, the economy expands until growth ultimately comes to an end with a recession.

A supercycle is a period of sustained expansion that creates strong, ongoing demand for the raw materials that go into manufacturing, consumer goods, energy production, etc. When it comes to metals, demand is usually strongest for metals like iron, copper, and aluminum, but there are several impacts on precious metals.

First, strong consumer demand often goes hand in hand with inflation. The world will often see gold bullion prices rise as more investors hedge against inflation.

The second factor is the role silver plays in renewable energy. During the last commodity supercycle, there was high demand for crude oil, coal, and natural gas. Today, the renewable energy market is much stronger, projected to be worth 1,510 billion USD by 2028. Silver plays a key component in clean energy, like solar panels, and the rise in clean energy demand could affect the price of silver bullion.

A commodity supercycle has three criteria that must occur at the same time:

  • Demand for commodities of all kinds is surging.
  • The production and supply of commodities are surging.
  • Prices for commodities are surging.

The simultaneous rise in supply, demand, and prices indicates that something other than the usual supply and demand factors is at work.

At present, there are many indications that the economy should be entering or already is in a commodity supercycle, but the global economy does not meet all three criteria. That said, it could be evidence that a supercycle is just around the corner, and the price of gold bullion today could be just an inkling of what’s to come as global demand crests.

A large jumble of gold bullion coins

#3 Global Instability: Wealth Preservation Against Crises

What happens to gold prices when wars break out, pandemics shut down the world, droughts lead to food shortages, and natural disasters become increasingly frequent and expensive? Instability can quickly drive bullion prices higher at both the local and global levels.

Stock markets do not tend to like uncertainty. They do their best when global trade goes on uninterrupted by events, geopolitical tensions, and natural disasters.

You don’t have to look very far in the past to see the impact that headlines can have. Gold and silver bullion prices were up 23% and 44%, respectively, a year into COVID-19 in the wake of lockdowns and the tightening of non-essential economic activity. At the same time, there were also growing trade tensions between the U.S. and China and disruptions to the global supply chain.

While COVID-19 impacted the whole world, more localized events can also shake up bullion markets. When Russia first invaded Ukraine in early 2022, Russian investors quickly foresaw the economic sanctions that would come from the rest of the world and the hit that the ruble would face. Many scrambled to buy gold coins and bars as they sought out a safe haven.

In the late ’00s, wealthier citizens of Cyprus faced a bank levy on bank deposits over €100,000 to pay for the country’s EU-backed bailout. The move, largely unprecedented in modern times, helped fuel panic among Cypriot and European investors, which helped drive gold prices to historic heights in the years that followed.

It can be difficult to measure the impact of global instability on bullion prices. That said, there tends to be a notable uptick in gold bullion prices when there are headlines that can change the course of history.

#4 Market Volatility: The Stock Market and Bullion

As with geopolitical instability, uncertainty on the stock market can also cause the price of gold bullion to rise alongside silver and other precious metals. Investors like steady growth in markets, whereas large price swings can make them nervous and start seeking out safe-haven assets. Large price swings can lead to either large price gains or large losses. It makes it difficult to find a good time to purchase stocks for the best returns, and many would rather seek out a safer asset.

Market volatility can be the result of a number of internal or external factors, including recessions in the world’s major economies, events that caused global instability, and financial crises like the recent Silicon Valley Bank run.

During periods of robust economic growth, stocks offer highly competitive returns, and it’s hard for bullion to keep pace. However, bullion provides a level of certainty and safety when stocks and other high-risk assets take a downturn. Many investors keep a certain percentage of their portfolio allocated to bullion, as stock market crashes are often unpredictable and come suddenly after an extended period of growth and stability on the stock market.

Aerial view of a gold mine in operation

#5 Supply and Demand: How Much Bullion Is Left in the World?

One of the defining features of bullion is its scarcity. All precious metals are valuable in part because they are hard to produce, and their supply is limited. Gold is one of the rarer metals on Earth, and that scarcity, combined with its lack of reactivity (meaning it does not corrode), led to it becoming an important store of value and means of exchange for thousands of years.

Mining new gold accounts for about 75% of annual supply. The rest comes from recycling (including recycled jewellery) and the release of gold reserves, although in any given year, central banks and other institutions may increase their reserves rather than selling them off.

There are also concerns about the limited availability of gold left in the ground. By some estimates, roughly 50,000 tons of gold remain in the ground that are economical to extract at gold bullion prices today. That is about 20% of all gold ever mined. However, that is not a firm maximum, as there are other known deposits that are simply not economical to extract until prices drastically increase or technology improves.

The price of other precious metals is also affected by limited production and increasing scarcity. Silver supply has not kept up with demand for several years, and much of its production is a by-product of mining for other metals like copper, lead, and zinc. Although silver is more common than gold (by a factor of approximately 15), there is much higher industrial demand for the metal. Another complicating factor is that many of silver’s industrial uses render it unsalvageable and impossible to recycle. It is a concern for silver’s ongoing industrial application.

Changes in the gold and silver supply chain can have major implications for bullion prices. Gold and silver are becoming harder to find and more expensive to extract. Sustained higher prices may make new deposits more feasible to mine.

Tracking mining industry news can give you insights into future bullion production, obstacles to new supply, and discoveries or innovations that can unlock new deposits.

Find Bullion Prices Before You Buy or Sell

Following broader market trends can help you make informed decisions about the direction of bullion, but you should always find bullion prices before you buy or sell. Compare the spot price (the price listed on the markets) to the price at which you can buy or sell physical bullion products yourself.

Global Bullion Suppliers is a trusted Canadian source for bullion, and we make it clear where your money goes when you buy bullion and what rates you can expect when you sell bullion.

When you learn how to buy and sell bullion, it’s not just about price watching and comparing rates from bullion buyers and dealers. Learning about the many factors that can influence gold and silver bullion prices can help you make better decisions about when to buy and sell and how to manage your bullion portfolio. These five factors have a great deal of impact on bullion prices, but there’s always more to learn about bullion investing.

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