The analysis of underlying factors which might influence the price of an asset or security, or which might influence a particular market as a whole. In the world of gold and silver, fundamental analysis involves thorough examination of the surrounding environment in order to determine the forces that might have an impact on prices in the long term. Fundamental analysis is primarily interested in factors such as the overall state of the economy, the interest rate levels, the general sentiment on the market, etc. rather than in past price paths (as opposed to technical analysis).
Fundamentals’ Main Advantage
The reason why you might find fundamental analysis interesting is that it offers help in determining the long-term trend. In other words, it suggests whether the price of an asset will go up or down in the long term. Because of that, fundamental analysis is crucial when you are deciding what to do with your long-term capital.
Please note that fundamental factors (fundamentals), as a whole, do not change from one day to the next (at least not in a visible way). Instead, they tend to evolve gradually and their indications change by degrees. So, if you invest in gold, it is unlikely that the fundamental outlook will change in a day or a week. Such a shift would more likely take months or - more likely - years to materialize.
Fundamentals may change rapidly only when unexpected events of great importance take place. For example, if the U.S. defaulted on its debts, the fundamentals of gold would change almost instantaneously (in this case they would support substantial appreciation of the metal).
Fundamentals’ Main Disadvantage
As you have noticed, fundamentals show you the direction in which the prices of an asset will most likely move in the long-term. However, this does not mean that the prices will move in that direction in straight line. In the short-term, various factors, for example investor emotions, may cause an asset to trade in directions contrary to those suggested by fundamentals. As a matter of fact, in the short-term, the abovementioned prices tend to diverge from the indications of fundamentals. This means that if you devote a part of your capital to speculation, fundamental analysis will not help you in identifying short-term trends and you must supplement it with other kinds of information, investment tools or technical analysis, for example.
If you take into consideration the fact that fundamentals change gradually, you will most likely come to the conclusion that they do not give you clear information when the trend will reverse. So, if gold is on its way up and the fundamentals are getting weaker, you might suspect that gold will eventually decline but you do not have any information on when this will happen. Fundamentals do not help you in timing your speculative trades as they neither indicate tops nor suggest possible bottoms.
Fundamental Analysis of Gold
The outlook created by the fundamental analysis of the gold market remains strong with the growing uncertainty in the world economy and rapidly expanding money supply. As governments try to cope with financial turbulence, they print more and more fiat money (money that is not backed with material assets). This fuels inflation that eats away government bonds yields. If the yields themselves are lower than the inflation, then you actually lose purchasing power by holding these bonds. In such a situation, investors switch to assets they believe will allow them to preserve their wealth. Gold is precisely one of such assets.
With the demand for gold growing both thanks to the demand for jewelry and thanks to the free exchange of information over the Internet, there is no technical possibility to satisfy the demand with both the existing and the anticipated gold supply. All of this suggests that gold is on its way up for the long term.
Fundamental Analysis of Silver
In addition to factors that affect the price of gold, the fundamental analysis of the silver market covers the issue of the industrial demand for the white metal. Silver is one of the most versatile commodities (in fact, only crude oil seems to be more versatile) due to its unique physical properties (best conductor of electricity and heat) and thus, it is imperative to keep the industrial demand (and changes in it) in mind while estimating silver's future prices.