When trying to value assets that don’t have earnings streams, that don’t have guarantees of principle and that are just ‘physical’ assets, it often comes down to pure supply and demand dynamics. The concept of supply and demand is one of the core concepts of economics and sometimes seen as the backbone of a market economy.
In essence, the whole price discovery process that we talked about in ‘The Financial System 101’ comes down to figuring out where Mr. Supply meets Mr. Demand. The price is really a function of how scarce the asset is and how much the market wants the asset. Ultimately, the last trade in the market place should be where the supply line and the demand line overlap or what we call equilibrium. If one of these factors is skewed, price can just go through the roof or completely collapse.