Credit: Dnn87 / CC-BY SA 3.0
We enter the world of commodities. Commodities are physical assets that you can touch compared to paper stocks representing shares in a given company. Each country produces or buys the commodities it needs to fuel its economy.
So, unlike stocks that are dependent on growing profits to move up in price, commodities rise and fall with the supply and demand of the physical asset.
The second key factor that affects commodity prices is price. Commodity transactions are priced in US dollars. If the US dollar falls, you can buy more commodities with a set amount of dollars. If the US dollar rises in price, you will buy fewer commodities with the same set amount of dollars. Let’s look at some examples:
China went off a spending spree during the past few years. The demand for commodities skyrocketed, and hence the prices rose sharply. Oil reached $148.35 on the futures market. Silver hit $49.80 per ounce. Meanwhile, the US dollar fell to 72.150 against a basket of currencies. This was the best of all possible worlds. You had high demand and a low US dollar.
Now the world changes with China’s economy turning down. There is less demand for commodities, and prices fall. Oil crashes down below $40.00 per barrel. Silver falls to $13.86 per ounce. At the same time, the economy of Europe begins to slow. Investors start moving their money from the Euro into the US dollar. The US dollar jumps to 99.88 against a basket of currencies.
However, against these trends, the demand for silver coins is outstripping the supply of silver. As a result, the US and Canada now have to import silver. The main factor suppressing silver prices is the high US dollar. Right now, silver investors are getting hammered. This can only continue until savvy investors see the benefits of buying silver and ignoring the US dollar. Then, short sellers will begin covering their positions, leaving more buyers than sellers. We are nearing this inflection point. This should be occurring during the next few months.
Always remember it’s time to buy when the sky is falling in upon you.