Crisis, quantitative easing and manufacturing all affect the metals markets—but the key is to understand why. Knowing what fundamental drivers move these markets will help you understand what is making them move today and in the coming years.
Even long held distinctions between base and precious metals are coming under question as new uses are being developed for all types of metals.
While fundamentals have shifted somewhat there are still distinctions. Base metals are malleable, ductile and corrode relatively easily. They are common metals that are not considered precious, such as copper, tin or zinc.
A precious metal is a rare, naturally occurring metallic chemical element of high economic value. Chemically, the precious metals are less reactive than most elements and are usually ductile.
The best-known precious metals are the coinage metals, gold (COMEX:GCM14) and silver (COMEX:SIM14). While both straddle the commodity/currency space, they are better known for their uses in jewelry and coinage.
More important is that historically precious metals were used as currencies and many investors feel they still act that way and can be used as a store of value—a more resilient currency than the fiat paper we carry around today. Gold and silver, particularly gold, are viewed as an investment that won’t lose value in inflationary times.
Gold’s place as king
Although gold has industrial applications, gold is a monetary asset and its prime driver is investment demand.
The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand.
Blu Putnam, chief economist for CME Group says people buy gold when they are scared of a financial disaster or if they’re afraid of inflation.
He notes that China and India are the two main countries that buy gold for jewelry and India has raised tariffs on gold imports three times during the last year affecting price.
While more traditional supply/demand factors of gold as a commodity can affect price, it is the supply/demand of gold as a currency that drives larger long-term moves.
“Gold prices corrected sharply last year and there were a number of factors for this,” says Patricia Mohr, vice-president economics and commodities specialist at Scotiabank.
“The all-time record high in gold was $1,921 per ounce on Sept. 9, 2011, and what drove gold prices to that level was quantitative easing by the U.S. Federal Reserve board and by the bank of Japan and the possibility that QE might be applied in the Eurozone as well,” says Mohr. QE in that regard is essentially printing money by the central bank and injecting cash into the economy to keep interest rates very low to try to kick-start economic growth.
Gold traders thought that Fed-led QE would ultimately prove inflationary— however that never happened.
Silver (COMEX:SIM14) is an industrial metal as well as a precious metal. Some of the industrial demands for silver, such as for film and electronics, have declined in recent years, which has caused demand to decline.
While some think silver is no longer a precious metal because of its many industrial uses, it is still very much both. Despite the more industrial uses for silver it is still highly correlated to gold (see, “A shiny pair,” below). “Silver moves in lockstep with gold and will continue to do so the next 18 months,” says Mohr who adds that silver is the most volatile metal, so new investors should be cautious.