How and Why are Precious Metal Prices Affected by Other Markets
In order to fully understand the impact that volatile market conditions in stocks or currencies can have on the prices of precious metals, it is important to understand why some investors will put their money into commodities in times of uncertainty. The simple answer to this is that, like real estate, commodities will always retain some amount of value, while stocks, especially those outside of blue chip companies, can carry much higher risk when market conditions become volatile. In order to protect themselves from this, investors with low risk tolerance levels will often decide to take the more secure route of keeping their money in commodities. When this decision is made, precious metals are a natural choice, as their values are less linked to worldwide capital investment conditions than industrial commodities, such as iron or copper.
The same can be said of the currency market, sometimes called the Forex, or foreign exchange, market by those who trade on fluctuations within it. When currencies begin to lose their value and buying power within the global economy, it can become beneficial for investors to move their capital into precious metals in order to ride out the currency adjustments.
A recent notable example of this phenomenon was the massive increase in the price of gold between 2008 and 2011 as a result of the global economic crisis that had driven many national economies into recession. With both currency and securities markets failing to produce regular returns, investors with lower tolerances for risk turned to gold as a holder of value in which to invest their capital. In the years that followed, gold prices dropped off again as investors began to shift their capital back into other markets.
Other Factors Affecting Precious Metal Prices
Of course, it would be wrong to assume that the prices of precious metals simply act inversely to securities and currency markets, as there are many other market factors that can impact them. In today's technology, many precious metals have industrial uses that they did not in the past. This is especially true of gold, which can now be found in many different types of electronics, and platinum, which is an essential component for the catalytic converters found in almost all modern automobiles. While these two are the most prominent examples, other precious metals have their uses in industrial and technological applications as well, meaning that they are, to some degree, affected by the conditions of the markets surrounding these sectors.
Conclusion
While other market forces do have an impact on the prices of precious metals, their ability to hold their value in times of economic volatility makes them a popular and safe investment for those trying to limit their risk exposure in the stock or currency markets. Such a move toward short-term precious metal investments is generally made by less risk-tolerant investors who are not willing to keep their money in volatile and uncertain markets. There are, of course, other investments that are popular for the same reason. The bond market, for example, offers many of the same advantages of precious metals during economically uncertain times. Bonds, however, do not have the same ability to yield profits that investment in precious metals has. For this reason, among others, precious metals remain a common go-to for those wishing to keep their capital in a relatively stable investment.
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