Monday, April 6, 2009

Investment in precious metals.

Prices of precious metals over the last year has undergone dramatic development. Initial impact came from economic recession. Lately, however, are strongly influenced by the increased inflationary expectations thanks to strong monetary expansion, in particular, by Fed. What are the changes in prices of gold, silver and platinum conformity and differences?

A very important factor determining the price of gold is inflation. In times when inflation is high, people resort to buying real assets, because they have their value, unlike money, usually kept. Important is also the interest rate, because it says, what are the opportunity costs, when instead of money to hold gold account.

If you combine the interest rate and inflation in one variable, then we get to the real interest rate, which is approximately the nominal interest rate minus inflation. Indeed, real interest rate in the U.S., it is a very good indicator of the price of gold. Low real interest rates mean increased demand of gold and thus increasing its price.

These trends are of course reflected with other precious metals such as silver and platinum. Although except storing of value function the gold has its function in the industry, it is weaker than the function of silver and platinum. The two latter metals are used in recent years increasingly in the industry because they are needed for the manufacture of catalytic converters for cars. With increasing environmental requirements and thus increasing the industrial use of these two metals. This is to some extent is different in its price behavior of gold.

Demand for silver and platinum, as we said, depends on the quantity of cars produced, the quantity of cars produced is in turn dependent on the size of the demand for cars, which is in turn influenced by a specific phase of the economic cycle. In a recession most people limit the expenditure on durables goods, and therefore the cars. Given that demand for platinum and silver affects the price of these metals, we combine the chain - the price of silver, and platinum is greatly affected by the economic cycle. On one side are the silver and platinum, like gold perceived as a store of value, on the other hand, their price is determined by the fact that the economy is in boom or recession.

And as has been empirically in the last year? The economic cycle was not actually so hard for gold, for which the price fell only slightly, to about 80% of the price before. Much stronger, however, was the reaction of silver and platinum, when their price fell by half, respectively. 40% of the initial price (Figure 1).

However, as the U.S. Central Bank FED performs rapid monetary expansion increases inflation expectations, which naturally help the prices of precious metals, which are gradually increased again. Gold has returned to levels known before crisis begun. Silver and platinum also in rebound in line with higher inflation expectations.

From the above chart can be seen that the relationship between the evolution of prices of our three metals there. However, if we want to examine this relationship more closely, it is better to look at the correlation graphs of each of the three possible pairs of our metal.

The prices of gold and silver is a relatively strong positive relationship, the ratio determination is greater than 0.51. Given that silver and platinum are both metals with industrial use, can be expected between their prices even stronger positive relationship (the more expensive silver, the more expensive platinum). Indeed, the ratio determination is very high - more than 0.90. Finally, gold and platinum have also a positive relationship, but the knowledge of the weaker - the ratio determination reached 0.26.


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