Commodities: What Determines Trends in Silver Markets?

Commodities: What are the Trends in Silver Markets?

The last year brought some significant volatility to investors that are holding precious metals positions.  Early gains in 2016 were quickly replaced by reversal declines, so for those with real money positions in assets like iShares Silver Trust ETF (NYSEARCA:SLV) should have an understanding of the economic factors that tend to most heavily influence silver prices.  

This article describes the four key factors affecting the market trends in the current silver price:

  • US Dollar (USD)
  • Supply and Demand
  • Uncertainty or Fear in Capital Markets
  • Inflation

1. US Dollar (USD)

Silver is priced in US Dollars and thus there is a strong inverse relationship between silver price and the US Dollar. Currency values are often best tracked using a forex trading account with an accurate price feed.  Generally speaking, when the US dollar strengthens, the silver price will drop — and vice versa. The recent sell-off of silver is a perfect example of this, so investors should also understand the factors affecting US Dollar in order to have a good understanding of where silver prices are likely to head in the future.

In the DXY price chart shown above, we can see the relative value of the US Dollar over the last five years.  Interest rates in the US, inflation, FED (Federal Reserve) policy, GDP growth, etc. are all factors that drive the USD. High interest rates, tight monetary policy from FED, strong US economy contribute to strong USD and thus can be thought of as negative factors for silver prices.

2. Supply and Demand

Silver price is also driven by supply and demand. Gold price rises when demand exceeds supply and vice versa. Demand drivers for silver range from jewelry to industrial applications. Silver is used in smartphones, PCs, and digital TVs as silver is highly conductive and is used extensively in the electricity markets. The supply level depends on silver reserves as well as production capacity of silver producing companies. If silver companies expect prices to go up in the future, they will increase production capacity, which increases silver supply.

3. Uncertainty or Fear in Capital Markets

In addition to gold, silver is also considered as a safe haven investment thus silver price rises whenever there is uncertainty or fear in capital markets.

For example, the silver price often rises whenever we hear about political uncertainties (e.g. Russia-Ukraine tensions, uncertainties in the Middle East, etc.) or worries about economic growth (slowdown in Chinese economy, etc.).

4. Inflation

Silver is considered as a good hedge against inflation because high inflation will cause a devaluation of the local currency (decrease in purchasing power) while silver’s purchasing power is not impacted. That’s why demand for silver rises whenever there is an expectation of currency devaluation.

Silver price is highly correlated to that of gold for certain periods of time given price of both precious metals is driven by similar factors. However, silver price is volatility is usually higher compared to that of gold. For example, silver price increases by 3% while gold price is up by 1.5% when we get news on political uncertainty.

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