While economists like to make the principles behind free markets appear exceedingly obtuse and complex, there are several straightforward basics that drive every situation. At the top of any list of such market rules is that of supply and demand. While it is easy to get lost in numbers and analysis, it is quite useful to step back and reconsider the power of these basic principles.

Understanding the Dynamics of Gold Demand and Supply

In simplest terms, when demand for a commodity rises and the supply of that item shrinks, the results are a growing level of pressure on the price for that commodity. So long as demand grows and supply shrinks, prices will rise, barring any artificial influences or factors.

Even when such temporary factors come into play, such as governmental intervention and regulations, the markets will eventually reflect the realities created. The many market cycles observed since the growth of global markets in the 1500s forward provide empirical evidence of these principles.

Supply and Demand in the Gold Market

Sophisticated long-term investors in gold and other precious metals fully comprehend this aspect of the marketplace. While many governments (and especially the United States) have attempted to control gold prices, they have been successful only over the short-term.

There are many dynamics at play today that are working to increase the demand for gold, while the supplies are increasingly limited by the costs of production. Those investing in gold bullion and buying gold coins are likely waiting for these market pressures to produce the expected results, knowing that the finite supply of gold and the intrinsic value of the metal secure a long-term investment.

Gold Demand Increases with Good and Bad News

The truly interesting thing about gold and other precious metals is that they are in greater demand when there are world economic concerns, as well as when certain markets are booming. Consider these facts for tough economic outlooks:

  • Gold has proven to one of the best assets providing historical protection for purchasing power 1
  • Gold is universally accepted as a preferred alternative to distressed paper currencies
  • Gold is one of the world’s most fungible assets
  • Central banks buy gold to shore up their currencies and stabilize economies

Conversely, when markets are growing and expanding, gold and silver demand may increase to meet industrial demand, among other reasons. 2

Supply Continues to Encounter Restraints

The reality of today’s market for gold buyers and precious metal traders is that the growing demands (for both positive and negative market reasons) is greatly exceeding the availability of gold.

Inexperienced potential gold buyers should be greatly encouraged when they grasp just how small the supply of gold really is today. In fact, all the gold ever mined would fit into the space of just one and one-half Olympic swimming pools. The annual production of gold, valued between $100 and $200 billion, does not equal the growing demand from industrial sources and central banks alone. 3

In addition to this market reality, consider:

  • Only a very small fraction of what is called “above-ground gold” is available for investment.
  • The costs of production of “below-ground gold” now are generally considered to be around $1,000 to $1,200 per ounce on an all-in-sustaining basis. 4 That provides a floor for the cost of any effort to increase the supply of gold, demanding capital investments in the billions.

When you see long-term gold investors and buyers brush off minor fluctuations in market prices, it is probably that the realities of supply and demand are at the heart of their confidence.

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