Supply and Demand, a thing of the past?

Following Tuesday’s precious metal market drops I was interested in what was driving the prices down. Long gone are the days of seasonal demand, the end of the calendar year rise, or a physical metal supply issue impacting the price immediately. The market has transitioned to a traded commodity, where the volume of trade in a day dwarfs the total precious metal supply available in the world. With the addition of ETF’s like SPDR Gold Trust (NYSE:GLD) and iShares Silver Trust (NYSE:SLV) trading an average 13 million and 44 million shares per day respectively, the speculative market for precious metals has taken control of the markets.

The London bullion market association handles over 70% of all precious metal trades made in a day, these trades are called over the counter (OTC) trades, and the “spot” prices and “London fix” are derived from this. The volume of these trades in a week are more than the total mining production for a whole year.

Due to the precious metal markets being so effected by speculator and high volume trading, as well as being used as a hedge against currency inflation by many different banks and countries, it is behaving more and more like a stock and less like the limited physical substance that it is.

Precious metals dropped anywhere between 2-3% on Tuesday, contrary to the fact that physical demand is going up, the Russian conflict, and that mining has been having strike issues. Saying that the dollar is strong feels like a joke, making the precious metal markets drop. In talking with some of our peers, the market sentiment is that the market has to turn around, there are just too many reasons for it not to. Any one or combination of reasons could cause a surge in the precious metal prices, whether it be a further prolonged platinum strike, mines declaring force majeure invalidating their contracts, a palladium supply freeze out of Russia, or a call on contracts for physical supply.

When any number of events occur that transition the markets back to the physical realm, and the reality of true supply and demand take back over, only then will the precious metal prices reflect what they really should be. That day can not come soon enough.