How Governments Printing More Money Affects Precious Metals

The Great Recession, COVID-19 pandemic, and other disruptors have a major effect on the economy. During these times, the government often prints more money as a response. Some people may disagree over the wisdom of this, but we can certainly see its effects on the precious metals markets.

There are many factors that affect the portfolios of those who buy silver coins, gold bullion bars, and other precious metals. Understanding these factors is vital for making smart investments. And if you hear the government is printing more dollars, just know that precious metals owners typically benefit.

In the following guide, we’ll delve into how increased currency production from the government can affect the price of gold, silver, and other precious metals. And once you understand this complex relationship, you’ll be better prepared to invest like a pro.

Printing More Money and Precious Metals Prices

Whenever serious economic issues affect America, the typical response is to print more money. We saw this play out during the Great Recession and more recently during the COVID-19 pandemic. In fact, 3.5 trillion new dollars entered circulation in 2020 alone.

Governments printing more money have a direct effect on precious metals prices. Of course, legislators rarely think of these commodities when increasing currency production. Their focus is to help a damaged economy, and frequently, that’s exactly what it does.

Unfortunately, several problems can arise from this sort of policy. These include:

• Higher inflation: When more money enters circulation, the general belief is that current dollars lose value.
• International de-dollarization: As other countries see America aggressively printing additional money, they are increasingly reducing their reliance on the USD.
• Higher debt levels: The government puts money into the economy by purchasing debts. Higher debts can reduce international confidence in the U.S. economy.

In each of these scenarios, many experts expect the value of precious metals to increase. This is particularly the case with high inflation — largely because paper currency becomes less valuable. Each of these situations, though, also creates fear in consumers.

When investors become fearful of the economy, they tend to buy silver and gold along with other precious metals. This is a measure of hedging against a poor economy. For instance, paper currency could lose all its value. It’s unlikely, but if it ever did, bullion would still hold value.

In addition to those who want to hedge against poor economies, there are also those who simply see a great investment opportunity. When the government prints more money and inflation rises, they often believe consumer prices will continue to climb. This is a perfect reason to invest in precious metals.

With the U.S. dollar on the brink of a continued downward trend — largely thanks to the government printing more money — the expectations of bullion prices rising are through the roof.

Inflation Can Weaken the Dollar Among Other Currencies

Inflation and international trust are hardly the only issues that affect precious metal prices. The following section will delve into many of these issues, but weakening of the American dollar deserves its own conversation. That’s because of the significant effect it has on prices.

When the government prints more money, inflation can lead to a weakened dollar. This doesn’t simply mean it has less purchasing power in America. It also means that the dollar loses value against other currencies. Since the USD is the benchmark for precious metals, this has a direct effect on prices.

Investopedia delves into why this happens:

“The price of gold is generally inversely related to the value of the United States dollar because the metal is dollar-denominated. All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher.”

To put it simply, a weaker dollar means it costs more to get the same amount of gold. This holds true for other precious metals when the government prints more money as well. While there’s no guarantee inflation will weaken the dollar internationally, it’s not an unexpected outcome when it occurs.

As the U.S. dollar weakens around the world, you can often expect to see precious metal values increase. And when you look throughout history, these economic downturns often lead to increased bullion demand. People like certainty, and that’s what precious metals can offer.

Factors Other Than Governments Printing More Money

When the government creates more currency, you might expect precious metals prices to climb. Historically speaking, you’d be right. There are a variety of other factors, though, that can affect this relationship. We’ve seen instances throughout history where these factors counteracted inflation.

In the first few months of 2013, for instance, the U.S. government was pushing out $85 billion in new currency every month. Many investors saw inflation as a near-term threat, but it didn’t play out that way at the time. In fact, gold and silver prices remained relatively stable in those months.

This is why considering all factors that affect precious metals prices is important. The following are some of the most impactful:

Supply and Demand

Like any other commodity or asset you invest in, supply and demand play a major role in the value of precious metals. When people started investing heavily in gold during COVID-19, for instance, the U.S. Mint actually could not meet the demand for new coins.

This meant it was more difficult to purchase these coins. In turn, the price of gold climbed to nearly $2,000 per ounce. These are just a few of the many factors that can have a direct effect on the supply and demand of precious metals:

• Conflict, hacking, mining issues, etc. can interrupt supply.
• Fears of economic stability can increase demand greatly.
• Increased industrial needs raise demand for certain metals.
• Losses in currency and stock markets increase demand for precious metals.
• Investment demand for exchange traded funds (ETFs) can increase demand.
• Discovery of new mines can increase production.

Some of these events could link directly to the government printing more money. Whether “the chicken” or “the egg” came first, though, matters less than the impact on precious metal values.

Interest Rates

Lowered interest rates from the Fed make investments like certificates of deposit (CDs) and bonds less attractive. That’s because their returns often don’t even outpace the rate of inflation. This simple fact is why precious metals are often a more attractive buy for investors.

As interest rates rise, though, buying palladium bullion and other precious metals can become less expensive. Interest rates are another economic factor that may correlate with the amount of money the government prints.

That these rates can simultaneously affect so many investments, though, is proof of just how influential the Fed can be.

Economic and International Uncertainty

What’s going on in the world can also have a serious impact on the price of precious metals. Economic uncertainty is one of the major drivers of bullion purchases. Of course, international uncertainty can do the same.

We only need to look back at some of the most recent crises of our time to see this. The price of gold shot up during each of the following tumultuous periods:

• Soviet invasion of Afghanistan in December 1979.
• Iran-Iraq war in 1979.
• Iranian hostage crisis in 1979.
• Iraq’s invasion of Kuwait in 1990.
• September 11 attacks on America and resultant wars.
• Talks of intervention in Syria in 2014.

Talk of war can certainly have a major impact on precious metals prices, but they’re not the only international issue that has this effect. When countries began speaking out against apartheid in South Africa, for instance, the most common gold coin on the market essentially became banned.

Uncertainty can be a dangerous thing, and investors respond with what they view as safe. Considering the fact that most popular precious metals have held value for millennia, it’s no surprise that they’re often the go-to purchase for uncertain times.

What to Do if the Government Prints More Money

Investing in any commodity or asset takes patience and staying informed. You can certainly go the safe route — such as CDs and bonds — and not have to pay much attention. Unfortunately, these investments often don’t even earn enough money to outpace inflation.

This is why countless people choose to step outside of these “safe” investing strategies. And if you opt to buy precious metals, you need a plan if the government begins to print more money. Of course, this plan should account for other economic factors as well.

Unfortunately, there’s just no surefire way of knowing if influxes of cash from the Treasury will lead to higher gold prices. As we’ve seen from history, though, the natural trend of these metals is growth. And even during times when prices drop, precious metals remain a store of value.

Visit our Precious Metals Bullion page today to see all your investment options.