Investing in Silver: What to consider
Not only is silver one of the most widely traded commodities in the world, it is also one of the most ancient metals to be used for commerce. Second only to gold in the precious metals trading volume category, silver has a variety of uses for numerous industries. Centuries of a mutual relationship with the currency market has created a codependency between the two, meaning changes in the currency market can have an impact on silver and vice versa.
Who should include Silver in their portfolios?
Commodity traders: Since it is the second-most traded precious metal in the world, traders and investors who focus on the commodities market often buy silver as part of a well-balanced commodity-based portfolio.
Currency traders: There’s often an inverse relationship between the currency market and the precious metal market, which is why many traders use gold and silver as safe haven assets for when the currency market becomes overly volatile.
Day traders: Like other commodities, silver often experiences price swings that could be leveraged for single day trades.
Long-term investors: With the rising popularity of cryptocurrencies, and the fact that 95% of the currency market is digital, these assets are much more exposed to speculation and inflation, unlike precious metals, whose value is derived from real-world availability. Therefore, silver could continue the overall upward trend in the future which it has displayed in past decades.
What drives Silver’s price?
There are various factors which impact silver prices, contributing to long- and short-term volatility. Since silver is a physical asset (unlike stocks for example), some real world event could have a tremendous impact on it. In addition, since it is part of the precious metal category, silver prices may often be affected by other assets within that category.
The currency market: The price of silver used to be the yardstick for measuring many currencies, since their prices were underpinned to its value. Moreover, silver is still in circulation in coin form in various countries around the world. However, unlike modern day currencies, silver’s existence is 100% tangible, which is why it is used as a safe haven asset (alongside other precious metals, such as gold). Therefore, when there’s extreme volatility in the currency market, or if one or more major currencies tumble, the demand for silver rises accordingly, and its price follows suit.
Supply and demand: While a trivial part of any financial instrument traded, supply and demand have a higher impact when it comes to physical assets. The majority of new silver introduced to the market is mined, and, therefore, its supply is dependent on many factors and a range of logistics. For example, a sudden spike in demand for silver in a part of the world that does not have local or nearby supplies, could raise prices, since transportation costs are higher.
Technology: Silver is a key ingredient in numerous electric and electronic products. As technology advances, and an increasing number of people around the world make use of modern appliances and personal electronic devices, the demand for silver is steady and continues to be driven by manufacturers who produce merchandise that depend on electricity.
Silver: Past, present and futures
From a trading standpoint, silver traders can be divided into two categories: Real market traders and derivative traders. Real market traders are those who buy, hold and sell the actual metal, and are actively involved in the silver industry. However, like other commodities, much of the trading in silver is done using derivatives, such as futures contracts and ETFs.
While silver is a tangible asset, much of its presence in the market has to do with speculation and opinion regarding its future price, rather than its current real world value. Therefore, its price could be affected by speculative behaviour, such as traders who believe its price will go up and subsequently purchase futures contracts. Moreover, investment products such as ETFs that contain silver futures, also contribute to the flow of funds in and out of the silver market. Therefore, both real world demand and demand for derivatives could impact silver prices.
History of Silver Trading
The history of silver trading dates back to the Roman Empire, more than 2,200 years ago. Over the next centuries, silver was used as a form of payment and as a raw material in many civilizations around the world. In fact, to this day, ownership of silver is considered a status symbol world-wide. The early mass silver trade of the 16th century is considered by many economic historians to be the birth of the global economy, as hundreds of tonnes of the precious metal was exported from South America to Europe and Asia.
When paper money was introduced, it served as a certificate to prove ownership of a precious metal. In the United States, for example, the “Silver Dollar” was minted to represent the actual dollar value of a coin in silver, and the dollar bill could be redeemed for silver. Mexico, which is the largest exporter of silver in the world, is the only country that still uses silver to mint its currency.
As the industrial revolution progressed and electricity became a crucial part of modern society, silver began to serve as a raw material for manufacturing various electric appliances, due to its high conductivity and relatively low price. To this day, silver is used in appliances ranging from washing machines to smartphones.
Conclusion: Silver is more than money
As dynamic and fast-paced as the contemporary trading word is, some assets have withstood the test of time and have stayed relevant for millenia. Silver is a fine example, as its use both as a currency and a raw material is recorded throughout history, dating back to early civilization. Therefore, even if the entire currency market goes digital, and physical coins become a thing of the past, silver will still be in high demand, due to its qualities as a raw material.
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*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results.