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What Factors Affect Precious Metal Prices?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 14 September 2016
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Precious metal prices shift in response to economic events, demand policy decisions, and social conditions like war and rioting. Investors have historically viewed precious metals as a safe investment refuge, and when conditions are poor, precious metal prices tend to go up. When the economic and social climate is strong, with projections for a positive future, prices typically drop. Researchers can compare historic pricing data against the major events of given eras to track the rise and fall of prices and their correlation with recessions, wars, and other events.

Palladium and platinum to respond to demand pressures from manufacturing and don't always follow silver and gold. These metals are considered precious and have values quoted alongside silver and gold, but their pricing tends to behave differently because they are industrial commodities. Silver and gold are treated more like investments.

For silver and gold, strength of the United States economy in particular has a profound impact on precious metal prices. When the US economy is not performing well and the dollar is weak, prices often rise. Gold prices usually rise first, as gold is a preferred investment, and silver tracks them. The lesser valued metal trades at a fraction of gold's price that may shift over time in response to changing market conditions as well as reduced supplies.

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Changes in the exchange rate, either up or down, can cause a fluctuation in precious metal prices as investors react. Downward trends tend to even out with a rising price for precious metals, while upward trends move metal prices in the opposite direction. When exchange rates stall out, precious metals typically also hover around a small pricing zone. Investors can also react to policy decisions and major news on topics like the budget, foreign investment, and industry regulation.

Recessions and depressions usually lead to more speculation in precious metals, as they are viewed as a less volatile and more dependable investment during these periods. Investors view precious metals as a store of value, and may trust things like gold and silver more than other types of available investments. Rising prices can soar in prolonged economic downturns. As economies start to improve, investors tend to sell out their precious metals, which can force prices down because the market floods with metals.

Studies on precious metal prices sometimes suggest that they change in response to natural disasters and major political events. Looking behind the scenes, these events are often tied to a shift in the exchange rate. The change in currency values may explain variations in precious metal prices linked with such events, in which case the events are not directly responsible for the change in value. Investors may monitor the news closely for signs that the exchange rate is about to take a turn up or down, and could prematurely buy or sell precious metals to reach for a better market position. This in turn causes a change in pricing that people may falsely correlate with the news, not with the underlying exchange rate changes investors expect to see.

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