Savvy investors understand that the trading market for precious metals is a highly dynamic one. Factors ranging from currency depreciation to geopolitical unrest to supply and demand all play important roles in determining the spot prices of precious metals.
News headlines and the media are yet another factor that plays into metal prices, and this element of the pricing equation is often one of the most difficult to predict. Here’s what every precious metal investor should know about how headlines can affect the spot prices of the metals they hold.
Why Do Headlines Affect Spot Prices?
Ultimately, the link between news headlines and precious metal spot prices always comes down to investor perception of how a given story may impact either the national or the global economy. When a piece of financial or economic news comes out, investors factor it into their assumptions about the strength of various markets. This, in turn, can exert some pressure on the spot prices of metals. The degree to which a piece of news affects spot prices is heavily dependent on what the news is and how wide-ranging its effects on the broader market will be.
As an example, consider news of new trade tariffs being imposed on a country with significant trade relations with the United States. When this occurs, it tends to put a downward pressure on stocks, as companies and industries that rely on imported raw materials from that country will face higher production expenses. At the same time, companies and industries that export finished goods to that country will see falling sales due to higher prices. Because new risks have been introduced into the market that may put downward pressure on share prices, there will be a tendency for precious metals, especially gold, to rise slightly when this kind of news is reported.
On the flipside, breaking news of another country’s economy crashing or on the brink may temporarily buoy the value of the American dollar. This, in turn, would tend to lower precious metal spot prices until the dollar weakens again.
How to Interpret the Effects of News Headlines
When trying to predict how a given piece of news will affect spot metal prices, the most important question to answer is whether the news will tend to drive investors into safer assets.
In the first example, the threat to earnings created by tariffs would tend to make stocks less attractive, thus incentivizing investors to increase their holdings of secure assets like treasury notes and precious metals. If the news is positive for the stock market, on the other hand (like in the second example), investor demand for precious metals will likely drop off.
Investor demand is, of course, the real mechanism by which most economic news headlines affect spot prices. Most news cannot sway precious metal prices on its own. When investors are actively moving money into gold, silver or other precious metals to keep it safe, the price of those metals will rise. When investors sell off precious metal assets, the prices will fall.
For this reason, investors who focus on precious metals should develop a deep knowledge of many different markets—not just the metals market. If you’re just starting off with precious metal investing, it’s completely understandable if you don’t know every facet of every global market. As time goes on, though, you should make a concerted effort to develop your knowledge of stock, bond, and commodities markets so that you can more fully understand how investors in these markets decide how to allocate their assets.
Although general economic news has an effect on spot prices, there are also pieces of news that are more directly tied to the market for precious metals.
During the commodity downturn of 2015, for instance, many silver mines around the world lowered their production until prices rebounded. This, in turn, put upward pressure on silver prices over time by limiting the supply. Interpreting pieces of news that are so directly related to the supply of precious metals is usually straightforward, but you still have to pay attention to what’s going on in the world at any given time.
News that relates to specific industrial applications of precious metals also falls into the category of stories that have more direct impacts on spot prices. News of increasing demand for electric cars around the world, for example, has put a slight downward pressure on the prices of platinum and palladium over the last few years, as both are used in catalytic converters for internal combustion engines.
By contrast, the demand for silver is actually increasing due to its use in solar cells. Technological changes such as these happen slowly over time, but are often summarized in news headlines—especially in financially-oriented publications like The Wall Street Journal and Financial Times.
The Trap of Trading Exclusively on News
While news headlines can indirectly affect spot prices, most experts agree that they generally shouldn’t be the driving force behind your investment decisions. As with stocks, news headlines often produce short-term volatility, followed by a return to more or less normal pricing. The news headlines you should factor into your investment decisions are the ones that are likely to have lasting effects on the overall economy. News about interest rate hikes, changes to tax codes, or major alterations to existing trade policies, for example, is worth factoring into your investing strategy.
If you are a precious metal investor, keeping an eye on the news and learning to understand how different types of news can affect spot prices is critical to your long-term success. Though you can develop a reasonably good idea of how different headlines will impact prices by studying economic theory, direct experience is also very important.
Be sure to observe how different news reports affect spot prices as they come up, and you’ll start to understand how the two are interconnected.
Stay tuned to our blog and News page for the hottest news stories that affect the precious metal investing world. You can even setup a market alert to be automatically alerted when spot prices hit a certain level.