Why Gold and Silver Are Soaring

Source: Thinkstock

Source: Thinkstock

Gold and silver have had phenomenal weeks, with the metals rising nearly 3 percent and 6 percent, respectively. Many columnists are claiming that this is due to escalating tensions in Iraq and the rising possibility that the Iraqi state will enter a state of chaos.

But this really isn’t the case, or it is in the same way that the assassination of the Archduke Ferdinand “caused” World War 1: It was the trigger, but in itself it was not the driving force behind the war. So perhaps there are some speculators that bought gold this week because they are concerned that political tensions in Iraq will escalate, but there are deeper factors driving the price that have been driving the price higher for many years now. Only those investors who understand this will have the confidence to buy gold when the market is weak, or when geopolitical tensions in Iraq (or anywhere for that matter) dissipate.

The price of gold has been rising for several fundamental reasons. The first is that demand is rising faster than supply. This demand is coming primarily from Asia, as central banks and citizens from that region of the world have more resources with which to buy gold, and they have a desire to do so. Prior to the beginning of the bull market—which began at the beginning of the century—people in Asia were far poorer than they are today. Furthermore, central banks and Asian governments didn’t have the massive influx of foreign reserves resulting from trade surpluses that they have today. Asian nations were debtor nations, and their productive capacities were limited with a couple of exceptions (e.g. Japan).

But now this has changed. Asians at the individual and at the government and central bank levels have wealth, and they are inclined to put this wealth into gold. Unlike Americans Asians aren’t drawn to the stock market. That isn’t to say they don’t have “animal spirits” or the desire to gamble (e.g. consider Macau). It’s just that stock ownership isn’t a concept that has been sold to Asians the way it has been sold to Americans: They don’t have easy access to wealth managers and online trading services.

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