Understanding Silver from a Trader’s Perspective

Silver is a commodity widely utilized due to its essential benefits in jewelry and electronics. Although not as rare or sought after as gold, it is still considered one of the most valuable metals globally and is one of the most traded commodities. In this article, let’s explore what silver is used for, its history, market operations, and what influences its price.

What is Silver and What is it Used For?

Silver is a precious metal used in jewelry, household items, and electronics. Investors can purchase silver for storage in the form of bars or coins, or speculate on its price. In the financial market, the symbol for silver is XAG.

Silver price charts can be used as indicators of economic health and help predict price fluctuations in various financial markets, including commodities, currency, and stocks.

Silver as an Investment Asset

The history of silver as an investment asset dates back thousands of years, with the first mining activities recorded around 3,000 BC. As silver became popular, mining operations spread worldwide, and the usage and value of silver increased. By the late 19th century, 120 million ounces of silver were produced annually to meet demand.

It wasn’t until the 1970s that silver prices began to be directly tracked, starting at $1.80/oz. Silver prices rose to $36 in the early 1980s but quickly dropped below $10 and remained at this level for over two decades. The silver market reached new highs during the financial crisis in 2008, with silver prices doubling to $20 – only to decline shortly afterward. The highest price of silver in history was nearly $50/oz in 2011.

Understanding Silver from a Trader's Perspective

Factors Influencing Silver Prices

Supply and Demand: An average of 27,000 tons of silver is mined worldwide each year, with China, Mexico, and Peru leading in production. Major importing countries like the US, UK, and India may require up to 29,000 tons of silver annually. Any increase, decrease, or imbalance can cause fluctuations in the silver market.

A significant portion of silver demand comes from the expanding industrial applications of this metal. Silver has the highest electrical conductivity of any metal and has become a vital component in building sustainable infrastructure, such as solar panels. This metal also has various applications in the medical field.

Economic Factors: Silver prices are also influenced by the global economy. During periods of robust economic growth, silver prices may rise as people consume more electronics and jewelry. However, economic and political crises can also cause silver prices to increase due to its safe-haven nature.

Gold-Silver Ratio: Simply put, the gold-silver ratio is how many ounces of silver it takes to buy 1 ounce of gold. In mid-2019, this ratio reached 90, meaning it took 90 ounces of silver to buy one ounce of gold. At that time, silver was trading at a high discount compared to gold. When this ratio is high, silver is often favored as it is cheaper relative to gold. A lower ratio usually favors gold, and a common decision is to swap silver for gold when this ratio decreases.

Silver and USD: Silver and the USD have an inverse relationship. A weakening USD makes silver cheaper for other countries, causing silver prices to rise. A strengthening USD makes silver more expensive, reducing the value of this metal.

The inverse correlation of silver with the USD makes it a popular inflation hedge asset. However, a strong USD can put relatively downward pressure on silver prices.

The chart below illustrates the inverse correlation of USD and silver.

How to Trade Silver?

Silver can be traded in various ways, from purchasing physical assets to futures contracts and options in the commodity market, and ETF funds. Speculators can also use CFD contracts to speculate on silver prices.

Why Choose to Trade Silver?

Silver is a popular commodity to trade because it allows traders to:

  • Take advantage of periods of USD weakness and hedge against inflation.
  • Capitalize on strong global industrial background and increasing demand.
  • Diversify investment portfolios.