If you are new to precious metal investing, you might be interested in knowing how economic downturns affect metal spot prices. That’s quite understandable, as bad economic times exert price pressures on metals in different ways that aren’t always easy to predict.
Here’s what you should know about the relationship between struggling economies and the price you’ll pay for gold, silver, and other investment-grade precious metals.
The Positive Effects
Unlike almost all other classes of investment assets, economic downturns have fairly robust positive effects on the prices of precious metals. This is because metals are tangible and will retain a considerable share of value in any market, regardless of how bad things get.
By comparison, under the worst possible circumstances, paper currencies can collapse, companies that issue shares can go out of business, and even bonds can be undermined by defaults. Though such cataclysmic occurrences are rare, investing in precious metals can guard against them.
The Negative Effects
Though precious metals are fairly remarkable in the sense that their prices often go up during economic downturns, it is important to understand that there are negative pressures as well. Generally speaking, these are produced by the decreased production of the manufacturing sector during times of economic distress. Most precious metals have at least some industrial uses, which makes them somewhat subject to the demands of industrial production.
Just as not all stocks or bonds behave the same way in any given market, not all precious metals react to economic struggles in the same way. Typically, gold is the metal that is most affected by the positive pressures of economic downturns described above. This is because gold has historically been the reserve metal of the world’s economies—a role that it still plays today. When markets turn down, many investors move to gold, causing its price to increase until markets stabilize.
By contrast, platinum, palladium, rhodium, and other metals that find most of their value in the industrial side of the demand equation are more exposed to the negative pressures that a struggling economy can put on precious metals. Though this rarely results in a sizeable drop in their prices, it can make them a bit more volatile in the short-term—a fact you should be aware of if you plan to invest in these metals.
Silver lies somewhere in between these two ends of the spectrum. Though it isn’t principally subject to downward pressures from lower production, its relatively low per-ounce price doesn’t make it quite as attractive as gold for investors trying to store large amounts of value in precious metals. As a result, silver tends to increase in value during economic downturns, but not always to the same degree as gold.
The Tie Between Gold and National Economies
A final point we should make is that it’s worth having a complete picture of how precious metals are affected by bad economic times.
For instance, many countries carry strategic gold reserves for major recessions and depressions. These gold reserves (larger than any individual investor could ever hope to amass) are used to guarantee sovereign debt and buoy national economies until their markets can recover. This dependence on gold is part of the reason why the price of this precious metal tends to remain stable or increase when normal markets begin to contract.
However, selloffs can also provide a counterbalance to this trend. If a major global economic power begins to liquidate its gold, the excess supply can put downward pressure on the price. Though this doesn’t affect gold’s standing as one of the best investments to have during periods of economic contraction, it is something you should keep in mind as a long-term holder of physical gold investments.
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 & Hyperinflation
- Geo-Political Unrest