Gold and Silver prices - Significant factors affecting

Following on from my look at the most significant factors affecting house prices, I would now like to take a look at the gold and silver, and the factors that most affect their prices.  (Update: See also: significant factors affecting share prices).

Like with house prices, I'm trying to determine what has the largest impact on their price over the long term, rather than the factors that cause their volatility, as I'm long term investor.

I don't claim to be an expert on the precious metals, but that's never stopped me from having an investment opinion before, so here goes.

The most significant factor affecting the price of gold and silver are their "roles".  The metals have a number of roles, which change over time.  These roles include currency, commodity, and preciousness.

Up until 1971, gold's primary role was as a currency.  Once this role of currency was removed, its role as a commodity became primary.  As a commodity, gold was not worth as much as a currency, and so over a period of 20 or so years, its price continued to fall.  More recently, as a result of loose monetary policy by the US and other governments, gold is reverting back to it's role as a currency.  As it does so, its price is rising again.

This is why I don't see a gold bubble at the moment - because there is a structural shift in the role of gold that is causing a fundamental reason for the rising price of gold.

Like gold, the role of silver historically was as a currency.  And like gold, it fell out of favour as a currency and primarily became a commodity, and more recently is returning to become a currency once again.  However, silver's role as a commodity was far more successful than gold's, as it has a lot more industrial uses than gold.  As a result, silver is getting consumed at a faster rate than it is being mined, and therefore it is becoming rarer.  Should this trend continue, silver will one day transition from precious metal to rare earth metal.  This will have a significant impact on it's price.  Failing that, silver's price will be determined by how it stacks up against gold as a currency, and whether both are required or not.

As a value investor I struggle to justify my position on gold and silver (ie, long).  After all, they don't pay dividends and they don't compound over time.  If I am correct in my opinions above however, I don't think that it matters.  As gold and silver transition back to being currencies, they form part of my "cash" reserves, and although I don't get any interest from them, I also don't have to worry about their purchasing power getting inflated away.

Then again, perhaps I lack value investing discipline, and just can't help having a speculative punt on some pretty rocks.