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What Drives Gold and Silver Prices

Gold and silver are the most popular commodities that can be traded and they enjoy a high volatility level. This means prices are moving on an intraday basis due to various factors and traders around the world speculate on their direction.

There are many reasons why people buy or sell gold and silver, and before going into more details about these two markets, it is mandatory to say that these days all brokers are offering the possibility to trade them. Offering commodities to trade on top or currencies and other financial instruments is just another way for brokers to diversify their products and to attract more and more customers.

Gold and silver are quoted against the U.S. dollar, and their symbol is XAUUSD and XAGUSD respectively. The spread between the bid and ask price differ from broker to broker, depending on the type of the brokerage house (dealing desk or non-dealing desk, ECN – Electronic Communication Network or STP – Straight Through Processing, etc.), and in general, both products can be traded on leverage like any other financial instrument.

However, these two markets are different than other markets because the price of both gold and silver moves based on various factors. Moreover, when compared with other financial products, the gold and silver markets are unique due to their limitation: there are a known gold and silver quantity that exists in the world.

What Drives Gold Prices

Like any financial instrument and commodity, supply and demand play an important role in the way gold is moving. If there are more buyers than sellers, price moves to the upside, and the opposite is true as well.

There is a limited quantity of gold above ground and that can be mined. This makes speculators and other market participants keen to estimate exactly how much gold there is and therefore to have an educated guess if there is a shortage or not in demand.

(read more below chart)

Speculation on gold prices calls for supply and demand levels to change and from this point of view gold is just another instrument to be traded. However, there is more to consider when looking for reasons why gold prices are moving.

Central banks play an important role in gold’s supply and demand. Gold reserves are a key factor in a central bank’s influence and some time ago there was even a gold standard imposed.

During the first world war, central banks in the United States, United Kingdom, France, and Germany played an important role in fighting against inflation and the most efficient way to do that was through its gold reserves. As a rule of thumb, back in those days, the more gold a central bank held as reserves, the more power it had.

Even to this day, central banks are holding gold reserves, but they are now only a small percentage of the total money that it is in circulation. The physical gold of a central bank is not held at each central bank headquarter because gold is difficult to be moved.

Therefore, when a central bank is increasing or decreasing its gold reserves, the actual gold is not leaving the vaults, it only has new owners. Because of this, it is common that, for example, Swiss National Bank's gold to be in New York. This is just an example to illustrate that physical gold reserves can be anywhere in the world.

Gold is typically associated with interest rates. As interest rates rise, the price of gold is falling and the opposite is happening when interest rates fall.

Because of that, traders are buying or selling gold based on how the monetary policy in the United States is changing. If the Federal Reserve of the United States is starting a tightening cycle, gold will lose value, and when an easing cycle begins, gold will be in demand.

This is the general rule of thumb, but in trading, things are not that straightforward. Imagine that the United States for the last eight plus years had interest rates close to zero and that has been seen in the price of gold moving all the way up to almost $2000. However, this correlation is subject to change on no notice at all.

Jewelry and industrial demand is another factor that drives gold prices, but most of all, gold is being used as a hedge against financial stress.

What Drives Silver Prices

Exactly like gold, silver too can be used as an investment. For many years silver has been used as a form of money, but recently it is appreciated for its properties.

It is used in various industries, like electrical appliances, clothing, and it even has some medical uses. However, like any commodity, speculation and supply and demand are the main drivers of silver prices.

(read more below chart)

It is a saying that speculation is an art and this is especially true in the case of silver. The entire silver market is much smaller than the gold market and in time there were a few cases when people tried to corner it. As a comparison, the London gold bullion market is approximately eighteen times bigger than the silver one. This gives an idea about the size of the silver market and why it is easier to influence prices.

To corner a market, it means to have a decisive influence on its price movement. Large traders and investors are using silver to hedge against inflation and financial stress, but also to speculate on its prices.

Because it is quite a small market, a sudden accumulation of silver contracts or disposes of them may make prices move aggressively. If a big player holds substantial short or long positions, it is extremely difficult to trade in the other direction as prices will be heavily influenced.

To sum up, gold and silver prices fluctuate mostly on changes in supply and demand levels, and this is true for all commodity markets. The smaller the market is, the bigger the spikes or dips in prices when supply and demand levels are fluctuating.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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