The Precious Metals Outlook From An Economists Perspective


Who knew pre-iPhone that RIM would be in such disarray that the price per share would be under $11? Yet by 2013 and beyond, most of us treasure pork bellies more than the Crackberry that we used to be addicted to. We all know that including commodities as a portion of our portfolio is a smart play.

Determining which commodities to invest in is a more difficult decision. Agricultural commodities can rise and fall with tremendous volatility due to weather and supply problems. The precious metals outlook is much more predictable. Bad weather might slow down mining, but it doesn’t make the metal disappear like it can to a corn crop.

To be clear, predicting what will happen to gold prices moving forward is anyone’s guess. Even Fed Chairman Ben Bernanke admits that he doesn’t understand the movements that occur in gold prices. Gold arguably has the highest level of emotional volatility attached to it of any investment.

Most large price fluctuations of gold could be described as panicky reactions to global turmoil or greedy responses to a favored cash cow that is reaching even greater heights. Whatever the movement, speculators stand to make a lot or lose a lot by buying gold. Indeed gold represents one of the most volatile precious metals you can buy.

The precious metals outlook for silver is a bit more predictable. Silver prices, while still vulnerable to the whims of the market, tend to follow supply and demand swings a bit more rationally. Silver is still a hedge against currency fluctuations. Similarly it offers a level of safety in the face of large swings in stock prices. The difference though from gold is that silver prices are tight a bit closer to their actual use. The demand for silver jewelry combined with an increase in its importance for an ever increasing number of industrial processes should induce a measureable and long-term price increase.

Economists love to scratch their heads over the price movement of gold, silver and other precious metals. They struggle to provide a concrete precious metals outlook based on economic data and market trends. However, economists do understand the long-term trends of these metals.  Furthermore, they can map out how those commodities are changing in price in relation to securities.

You actually don’t have to fully understand why precious metals react the way they do to global news or market scares. What you do have to consider though is the historical price changes over a long period of time.

The long-term precious metals outlook is excellent. What we are talking about is a finite resource. Advances in mining techniques should yield greater supply. Increased environmental restrictions and regulations should choke supply. The result is that you can safely maintain a reasonable expectation that the supply of precious metals will not dramatically increase. Instead, it should remain relatively stable.

The precious metals outlook on the demand side is less clear. We simply do not know how demand will change for gold, silver, platinum, palladium and other precious metals. We do know that manufacturers are finding greater uses for these materials, especially as the demand for complicated electronic devices are developed for the use in sophisticated industrial applications and even consumer products.

Economists do understand these dynamics, and they understand the direction that precious metal prices are supposed to go given certain economic conditions. Yet, they also are aware of historical trends where prices moved opposite of the rational direction.

The precious metals outlook is positive when viewed rationally. Even economists don’t know though if the prices will behave rationally. In the end, all an intelligent investor can do is to buy before the craze, hold the asset to properly diversify their investment portfolio, and eventually sell their asset once their price targets are met to take some profits off the table.