What Really Drives the Price of Gold and Other Commodities
There seems to be a major disconnect in the financial world today about what drives the prices of commodities. This ignorance has been displayed through some well intentioned financial “experts” who have gone on record saying that gold and silver prices are in a bubble and have reached their peak. Typically, these financial prognosticators point to the fact that thus far, investors who have bought gold and silver have done so out of fear and that once the economic recovery takes hold, the metals will fall as investors relax and go back to more sane investments like mutual funds. While I agree that precious metals prices have risen dramatically over the last several months, I believe those who dismiss gold and silver do so to their own peril.
It is understandable that many modern financial commentators don’t understand gold. In fact, many investors do not even understand how to go about buying precious metals. This is because we all live in a “paper” economy. In this paper economy, the government with the help of the large banks and financial institutions like mutual fund companies, make all of the rules. These financial “rulers” are proud of this paper economy that they have created where all money and all assets are paper and are easily controlled and manipulated. Gold and silver are unique in that they come out of the ground. They are not made of paper. And since they cannot be printed, they are much more difficult to manipulate and control.
But in the wake of Washington’s absurd fiscal and monetary policies, commodity prices have soared. And because money typically flows to the rate of highest return, today’s investor has been awakened to a new world of commodity investing which has produced incredible returns amid the financial crisis. Commodities include such things as wheat, rice, corn, sugar, cotton, gold, and silver, just to name a few.
According to economics 101, supply and demand are in constant competition. People have unlimited wants (demand) on a globe that has limited resources (supply.) So when demand increases for a particular good or service, the supply of that good decreases, which drives prices up. The supply and demand picture for many commodities are similar. As the global population continues to grow, and as the East becomes increasingly Westernized, demand for the most basic commodities are driving down supply, and thereby causing prices to rise.
Apparently this concept of supply constraints and insatiable increasing demand boggles the minds of many financial commentators today. After all, in their “paper” economic world, if want something, you simply print it. Want to increase the supply of currency? Simple. Just borrow from the Federal Reserve. When a company wants to issue more stock, guess what? They simply issue more stock. When the government runs out cash, the fix is easy. It orders more to be printed by “selling” bonds. In today’s wonderfully flawed paper economy, supply is never constrained as long as there is plenty of ink and paper. But in the real world, economic laws still rule. There is only so much accessible cheap oil in the ground. You cannot print more oil. There is only so much gold and silver that can be mined in a given year. You cannot simply print more metal.
Perhaps one day, commodities will become “economically” enlightened like their mutual fund cousins. But until then, expect the antiquated roles of growing global demand and supply constraints to continue to drive commodities, like gold and silver, higher in the coming years.
Jerry Robinson is an economist, published author, columnist, and international conference speaker. In addition, Robinson hosts a weekly radio program entitled Follow the Money Weekly, an hour long radio show dedicated to deciphering the week's economic and geopolitical news.
Robinson has appeared on numerous TV and radio programs, including FoxNews, to discuss global economic topics. Robinson is also the best-selling author of the book, "Bankruptcy Of Our Nation: 12 Key Strategies For Protecting Your Finances In These Uncertain Times." (New Leaf Press, 2009)
His writings and radio show can be found online at http://www.ftmdaily.com
Investment Advice Disclaimer: This article is intended to provide general information without taking into account any particular person's objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or decision.
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