Silver Value Drivers: Economic Factors

What is driving the price of silver? If you’re considering trading silver, it’s essential to understand the factors that influence its value so you can make educated predictions about how its future price is likely to fluctuate.

This Plus500 article will take a deep dive into the factors that drive the price of silver, starting with supply and demand dynamics and moving into economic and market forces. By the end of this article, you’ll have a better understanding of the main reasons behind current silver price movements.

What Is Driving the Price of Silver?

Silver, symbolized as “Ag” with atomic number 47, is a fundamental chemical element that is important in the financial sector as both a commodity and a tangible asset. In the financial markets, silver is denoted by the ticker symbol XAG.

Silver is considered valuable as a precious metal used for jewelry, luxury goods, and portable wealth and as a commodity with industrial applications, including electronics, electric vehicles, solar power, and medicine. To learn more about what is silver, see our comprehensive article: “Silver Fundamentals for Traders.”

The significant factors influencing silver prices can be divided into two main categories: fundamental supply and demand dynamics, and economic and market forces.

Fundamental Supply and Demand Dynamics

Primarily, the price of silver is determined by the imbalance between supply and demand.

Silver supply primarily comes from dedicated silver mining and as a byproduct of mining for other metals. According to the Silver Institute, in 2022, only around 27% of silver came from dedicated silver mines (228.2Moz), while 72% was a byproduct of mining other metals such as lead/zinc (248.2Moz), copper (212Moz), and gold (129.5Moz).

In 2022, silver production amounted to 822.4 million ounces, experiencing a marginal decline of just 0.6% compared to the preceding year, 2021. This followed a 5.8% increase in silver production in 2021 as mines rebounded from the disruptions caused by COVID-19.

Understanding these production trends is crucial for assessing the balance between supply and demand dynamics in the silver market.

Demand essentially refers to who wants to buy silver and how much they want to acquire. In addition to jewellers, other creators of luxury goods, and mints, silver is in high demand for industrial purposes. In January 2023, Nicky Shiels, head of metals strategy at MKS PAMP, stated that industrial demand accounts for nearly half of all silver demand. This highlights the importance of industrial use in influencing overall demand for silver alongside sectors like jewellery and investment.

As new silver-based technologies emerge, such as photovoltaic (solar) technologies, the demand for silver will likely increase. However, new technologies that can replace silver with more affordable alloys in some applications are also being developed.

Overall, the price of silver in the future will principally be driven by supply availability from mines and consumer demand for silver. When demand places pressure on or outstrips supply, silver prices usually rise. When availability is good, and demand is relatively low, silver prices usually fall.

Unraveling a Surge: Why Did Silver Go Up?

Silver prices rose steeply in 2020, reaching more than US$28 per troy ounce in August 2020 due to supply shortages resulting from mining disruption caused by COVID-19, which saw supply drop to its lowest level in several years. Demand also dropped but not as much as supply.

In 2021, after the COVID-19 pandemic, silver demand increased with the return of weddings and other social events in various countries, especially India, leading to higher jewellery production.

A rebound in healthcare services that require silver, such as X-rays, also contributed to the post-COVID-lockdown increase in silver prices as demand increased.

A research paper published by the University of New South Wales suggests that solar power manufacturers will need 20% of all current silver supply by 2027 and 85-95% of all silver supply by 2050. This, along with the use of silver in solar energy and electric vehicles, may see demand for silver increase over the coming years.

Understanding a Price Decline: Why Did Silver Go Down?

According to a London Bullion Market Association report, silver prices declined in the second half of 2022 because supply from mines recovered faster than industrial demand. This was largely because COVID restrictions were lifted in Peru and Mexico, both major silver mining countries, before countries like the United States and China, where silver is in high demand for manufacturing.

Economic and Market Forces

Silver is part of the broader economy and market, and interrelated factors significantly impact the price. But while these economic and market forces have an effect, no single one is a reliable predictor of what silver markets will do. They need to be used collectively and in combination with supply and demand factors to understand what silver is likely to do.

Inflation

Historically, silver has been seen as a “safe-haven” asset alongside gold. This has traditionally seen silver’s price increase when inflation is high because, while currencies are losing value due to high inflation, gold and silver are seen as retaining their value. However, while this is a general trend that has been observed historically, it is not always the case.

Interest Rates

While currencies are interest-earning assets that can gain value when interest rates are high, silver, like gold, is a non-interest-bearing asset. Therefore, when interest rates are high, traders will often opt to shift their focus from silver to interest-bearing assets, leading to a decrease in the value of silver due to reduced demand.

Economic Growth and Crises

Periods of economic growth and crisis impact the price of silver. Supply and demand factors illustrate how rising economic growth can fuel market demand, potentially increasing silver prices.

However, as a historical trend, silver prices have usually had an inverse relationship with economic growth. When GDP is growing, silver prices tend to fall. When growth is weak, silver prices tend to rise.

Since 1973, there have been four major recessions, and in three of the four, silver prices rose during or at the close of the recession. But there are significant exceptions. For example, in 2010, the global economy was booming, but silver prices also increased due to high demand.

Market Speculation

While traders generally respond to what the market is doing, what they choose to do can also influence the market. If enough people agree on what the market should be doing and trade accordingly, they can push the market in that direction. While the effect of market speculation is usually small-scale and temporary, it can have a sustained effect.

A notable historical instance of market speculation significantly disrupting the silver market occurred in 1974 when the Hunt Brothers, heirs to an oil fortune, anticipated that high inflation would drive up silver prices as investors sought safe-haven assets amidst currency devaluation.

Therefore, they started buying physical silver and silver futures to corner the market. By the end of the brothers’ buying spree, the price of silver had risen significantly, and they held around US$ 4.5 billion worth, which was about two-thirds of the market.

At this point, the US government became concerned about private individuals manipulating the nation’s silver reserves. Regulators introduced special rules to prevent any new long-position contracts or futures on silver. In this way, the government undermined the brothers’ position, and the price of silver began to fall. The government also ensured that the Hunts could not access credit to maintain their position.

On March 27, 1980, also known as Silver Thursday, the market plunged in response to these government actions. In the aftermath, the Hunt Brothers were brought before Congress, charged with market manipulation, and forced into bankruptcy.

How to Start Trading Silver

Effectively trading silver necessitates a comprehensive grasp of the fundamental drivers shaping its market value. These drivers can be broadly classified into two categories: supply and demand dynamics and broader economic and market forces.

These various factors converge to create a complex framework. Considering them collectively is crucial for making informed predictions about the likely future trajectory of silver prices.

When venturing into commodities trading, including silver, explore various options. While there are several methods available to start trading silver, consider the following steps:

1. Select Your Trading Method: Begin by choosing a commodities trading method that aligns with your risk tolerance and investment goals. Whether it’s futures contracts, options, or contracts for difference (CFDs), each approach has its unique advantages.
2. Understand the Commodities Market: Learn about supply and demand dynamics, seasonal trends, and the factors influencing prices. A solid understanding leads to informed decisions.
3. Create Your Plus500 Account: If you’re interested in trading silver CFDs in order to gain exposure to Silver prices without physically owning it, explore Plus500. Sign up, verify your account, and gain access to a user-friendly interface. Commodities CFDs are available on Plus500, offering leverage on silver CFDs and round-the-clock customer service.
4. Develop Your Trading Strategy: Consider factors like risk management, entry and exit points, and position sizing.

Learn more about these steps in our comprehensive article, “How to Trade Commodities With CFDs.”

FAQs on Silver Prices

How can I predict silver price movements?

Traders use various trading strategies combined with detailed market knowledge to predict silver price movements. For example, they might use technical analysis to identify moving averages over different periods to find signals to buy or sell.

How does the price of gold affect silver prices?

Silver often tracks the price of gold on the bullion market due to having similar investment characteristics. When gold prices rise, silver prices tend to follow as traders see silver as a more affordable alternative to gold.

However, silver tends to exhibit more volatility than gold because it is more highly influenced by industrial demand, so it does not reliably track the price of gold.