Americans always late buying gold?

December 28, 2017

Pat Heller

There is a discussion going on now as to whether or not the investment demand for precious metals really matters to their prices, or if the price affects investment interest.

There are some who analyze the precious metals markets only taking into account the industrial demand for the commodities. I think investment demand also impacts the price. However, that idea needs to be tempered. Part of the demand also seems to be affected by significant increases and decreases in prices. To the extent that is true, you could say that prices create investment demand instead of the other way around.

A reference to what has happened with the price of Bitcoin thus far in its history gives a perfect example of what I am trying to describe. It was possible early after its creation in 2009 to buy one Bitcoin for less than one U.S. dollar, or just a few dollars. Yet, this low price did not stimulate demand from the general public. Public interest and demand didn’t really seem to take off until this year after its price was well above $1,000. In this instance, some would argue that it was the rising price, not the earlier low price, that created rising public demand for Bitcoin as an investment.

So, do the prices of precious metals need to be rising or falling significantly in order to stimulate investment demand, no matter the actual price?

Over the years, there has been a tendency for gold and silver demand to decline if prices were stable. But there have been different demand patterns between Americans and people in the Far East.

There tends to be rising demand in the Far East when prices are low (and falling demand after a major price run up). We also saw that with Bitcoin, where Chinese demand has perhaps been the strongest market for much of 2017, partly from fear of a fall in value of the Chinese yuan currency and partly from the difficulty of being able to acquire safe-haven physical gold and silver.

Americans, in contrast, tend to wait until precious metals prices have passed a market bottom and are well on their way back up. The U.S. Mint’s bullion-priced gold and silver issues saw demand in 2017 drop roughly 50 percent in ounces from 2016. Sales of these coins are concentrated in the United States. Gold Eagles are not popular in the Far East because they are not pure gold, and the rest of the U.S. coins are priced at higher premiums than issues from several other nations. We have also seen that pattern in Bitcoin demand this year, where demand rose in China and Japan at lower price levels and in the United States only after prices rose dramatically.

Where was demand for physical precious metals strong in 2017? China, India, Russia, Germany and many European nations. This demand was sparked by fears of falling local currency values, as protections against actions or inactions of the U.S. government, or to diversify investments. Weak precious metals demand in 2017 was concentrated in the United States.

In sum, there is no one-size-fits-all answer to the question of whether price (when considered by itself) affects investment demand for physical precious metals. Low prices do stimulate demand in the Far East, but there is a constant demand no matter the actual price level. Volatile prices seem to impact demand more than the absolute price levels in the United States. In other countries, demand is perhaps more affected by factors other than price. So, any analysis of the precious metals markets does need to incorporate both overall investment demand and also what is happening with price levels.