Gold and silver are two of the four precious metals, which are generally considered to be gold, silver, palladium and platinum. Aside from their use in jewelry, they have important applications in engineering, electronics, and medicine. These metals are also recognized as instruments of trade in their own right and are considered by many as two of the oldest ‘currencies’ in the world.
Gold has been used in the production of luxury goods since prehistoric times. Its rarity, and resistance to decay and tarnishing has made it precious to virtually every civilization, while its softness and malleability makes it easy to use in jewelry and decorative items.
It is also increasingly in demand from the electronics industry, thanks to its exceptional conductivity.
Silver has anti-bacterial properties as well as high conductivity, making it ideal for a wide range of applications, including dentistry and water purification, as well as electronic engineering, in addition to jewelry.
How are precious metals traded?
Trading in precious metal has been central to trade for millennia, and remains at the heart of commodities trading today, with gold being the metal most commonly used for this purpose.
Investing directly in gold bars is one way to access these markets. One of the largest markets for gold bars is organized in London, where the standard size of a bar is 400 troy ounces, although smaller bar sizes are available. The standard size for silver bars on the London market is 1,000 troy ounces, while for platinum and palladium the London market trades bars between 1 and 6 kilograms.
However, physically trading and taking direct ownership of precious metals is costly, requiring specialist vaulting and custody arrangements, secure transportation and insurance coverage. Indirect trading, through instruments such as ETFs, futures, and forex may provide a more practical way to access the potential of the precious metals market.
What drives precious metal markets?
Like other commodities, precious metal prices are often driven by the basic factors of supply and demand.
Gold demand used to be dominated by the jewelry business, and although this remains the case, the sector has declined from an 80% market share in 2002 to 50% in recent years. This is largely due to the popularization of gold as a means of investment. Demand for gold bars, coins, and ETFs surged between 2003 and 2013, greatly contributing to high gold prices at the beginning of the 2010s before declining somewhat and stabilizing at around 30% of the market.
Meanwhile, supply is relatively constant. The supply of all four of the main precious metals (gold, silver, platinum, palladium) comes to the market from two sources: mining production and recycling of scrap material.
Mining provides around 70-85% of total precious metal production. The well-developed trade in recycled material will account for the remainder, and the actual proportion fluctuates with time, reflecting the changing cost of production, reclamation values, and the economic outlook.
Although it is possible that new deposits will be found, reducing the cost of supply, it is demand that has the biggest impact on precious metals prices. After all, gold and silver are finite resources, and unlike traditional currencies, central banks cannot simply create more gold in times of economic need. All the metals have industrial uses, and the demand by manufacturing will fluctuate with the level of the broader economy. However, precious metals, and particularly gold, are widely held as investment commodities.
As a ‘safe haven’ investment, gold may therefore move in a contrary direction to the general economic trend. When stocks and currencies fall or the market faces an extended period of uncertainty, the price of gold often rises. Conversely, when the stock market is performing well and the market has a larger appetite for risk, gold prices can fall.
As well as private investors, central banks hold a significant amount of their reserves in gold.
The IMF and the World Gold Council estimate that the world’s central banks hold around 33,000 metric tons of gold. Any factors which affect the central banks’ tendency to hold or sell gold will have a significant effect on the market price.