Jack Falvey’s Investor Education Briefs: Precious as gold or dirt cheap is determined by supply, demand
By JACK FALVEY
December 25. 2017 10:42PM
People shop for last-minute purchases before Christmas on Oxford Street in London, Dec. 23, 2017. (REUTERS/Mary Turner)
Scarcity is often managed. “Sale ends Thursday” or “While they last” are common declarations in the consumer economy. How much is available, the supply, determines how much those demanding it will pay for it. “Dirt cheap” is a relative term. A square yard of dirt in mid-town Manhattan is very expensive property.
Location often has a lot to do with determining demand and price. Gold is relatively rare. Its short supply, combined with its luster, have kept it in steady demand through the ages. It is considered by some, called “gold bugs,” to be a good investment in itself.
An increase in supply brings down the asking price, as any farmer with a great harvest will tell you. The abundance of natural gas has reduced its price, but has also increased its usage. More labor-intensive coal, while plentiful, is not as competitive in a lower-priced energy market.
There can be many factors involved, but understanding how prices adjust automatically with the variables of supply and demand will allow you to deal with volatility without thinking manipulation as a first option. To control supply or corner a market so prices will increase is not easy to do if the supply is large enough and its sources are diverse.
In managing our personal financial portfolio, it is a good idea to understand what makes things go up and down. When the earnings of an equity have a consistent upward trend, its market price tends to increase as more people demand a share of the fixed amount stock supply available in that enterprise. When earnings are not as forecast, the demand goes down, and those wishing to sell their supply must accept a lower price for their stock.
Each supply-and-demand curve has its own set of variables. The principle is sound, and markets have historically operated accordingly. Government interference in markets has always been a factor. You must consider market forces in relationship to the third-party force of regulation.
Risking assets in an uncertain economic environment has historically reduced the supply of those willing to accept that risk. Supply and demand work best with the least possible outside interference. Dirt is not always cheap and gold is not always the thing to buy. Who knew? You now know.
Jack Falvey is a frequent contributor to the Union Leader, Barron’s and The Wall Street Journal. He can be contacted at Jack@Falvey.org.