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Ammo Shortage Is a Lesson in Supply and Demand

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gun.jpg

A Smith & Wesson .357 magnum revolver. Leading firearms maker Smith & Wesson reports almost 50 percent increase in sales revenue.

Photo by Kevork Djansezian/Getty Images

Have you tried to buy a gun or ammo lately? The proposed gun control legislation has prompted an old-fashioned bank run, only this time it's at the gun stores. People are buying up anything they can get. First, it was fear that the proposed gun control legislation would prevent them from owning certain types of equipment. Then, as supplies started to diminish, people started hoarding all types of ammo, just so they would have it. As a result, many are wondering if this a secret government conspiracy to overturn the Second Amendment.

No, it's just the law of demand and supply at work. What you are seeing is an asset bubble in ammo, just like we saw in housing in 2005. There, the demand for housing drove prices to unsustainable levels. Prices are rising in ammo, but since it is much cheaper per unit than a house, demand is still creating shortages. However, some aspects are similar. During the housing bubble, buyers rushed to be first to place a bid. During the ammo bubble, buyers often line up in anticipation of the supply trucks.

What It Means to You

What's the likely outcome? At some point, the bubble will burst. Just like in the housing bubble, there will be some triggering event that stems the inflated demand. It will most likely happen when the gun control legislation is resolved. If it's passed, then gun owners will know what's been banned and what hasn't. If it's denied, then there's no longer a reason to hoard ammo.

If the accelerated demand continues long enough, then ammo manufacturers will find ways to increase supply to alleviate the shortage. In time, new suppliers will enter the market.

In either case, whether demand drops or supply catches up, there will be an excess of ammo supply. Ammo hoarders probably have enough on hand to last several years. Their demand will disappear. At that point you'll see discounts and sales as retailers and manufacturers try to maintain revenue and profit in the face of little demand. That's exactly what happened in the housing market, and it's the end of every asset bubble. It could take years, but even guns and ammo must abide by the laws of supply and demand.

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