The Global Metals Trade worldwide has caught the attention from everyone in the market. We see prices accelerating to new highs as investors rush in to the precious metals futures market. Why are these investors getting in to this market? What is the buzz really all about? There are many reasons for the precious metals futures influx but the fundamentals are key to realizing the sanity of the idea.
Obviously the first fundamental like in any other commodity is the case of supply and demand. When you have an excess supply with low demand you are going to see prices fall. In the case of this market it is the opposite, when demand rises and supply falls prices rally sharply as we have seen in the last 4 months.
Another fundamental for investors to enter the precious metals futures market is the state of the worldwide markets and economy. If you don’t have any faith or trust in your own government you may want to start putting your capital elsewhere. When there is fear and gloom in the markets this is a possible sign to start heading into precious metals futures as a flight to safety against a weakening economy. Also in a time of war or invasion you may see precious metals futures prices start to flourish. In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
A Third fundamental is low or negative interest rates. If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities may increase. An example of this is the period of stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.
The last fundamental is that of the currency market. If the relationship between the USD is weakening against other major currencies this may be a sign of investors taking their assets out of their own money and putting it into Gold. We have seen this happen for much of the last 6 years as the USD has continued to weaken against other major currencies. People fear that their currency may become worthless and put their capital towards Gold as this commodity has always purchased bread and shelter.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
