Silver

What Is Silver?

People have used this metal as money for more than 2,500 years. The word for money in French, “argent”, still means silver, and the British pound was once literally a pound weight of it. Governments stopped backing currencies with it during the 20th century, and the United States removed silver from its dimes and quarters in 1965.

What makes silver unusual is its second career. It conducts electricity and heat better than any other metal, so it ends up in solar panels, electronics, car electrical systems and medical equipment. Gold is bought mostly for jewellery, bars and central bank reserves. A larger share of silver is used up by industry, and much of that metal is never recycled.

That split personality is the key to understanding its price. In a crisis, investors may buy silver as a cheaper cousin of gold. In a slowdown, factories order less of it. Both forces act on the same market at once, and the rest of this article looks at how traders read them.

How Does the Silver Market Work?

Price discovery happens in three places. The London over-the-counter market trades physical bars of about 1,000 troy ounces between banks and dealers. COMEX in New York lists commodity futures on 5,000 ounces per contract. The LBMA Silver Price, set once a day in an electronic auction, gives miners and refiners a reference rate for contracts.

Retail traders mostly see the spot price, which is the price for immediate delivery. Contracts for difference and exchange-traded funds track it, so you can gain exposure without storing metal. Futures for later months trade above spot in normal conditions because a holder of physical silver pays for storage, insurance and the money tied up in the position.

Many traders judge silver through the gold/silver ratio, the number of ounces of silver needed to buy one ounce of gold. If gold trades at $2,000 and silver at $25, the ratio is 80. When the ratio rises, silver is getting cheaper relative to gold, and when it falls, silver is outperforming.

Here is how the ratio turns into a trade. Suppose the ratio sits at 100, with gold at $2,000 and silver at $20. A trader who expects the ratio to return toward 80 sells one ounce of gold and buys 100 ounces of silver.

Now gold rises 5% to $2,100 while silver climbs 31% to $26.25, and the ratio drops to 80. The silver leg gains $625 and the gold leg loses $100, so the position makes $525 even though both metals went up. Had the ratio climbed to 120 instead, the same trade would have lost money, because the bet is on the relationship, not on direction.

What Moves the Silver Price?

Four forces drive most moves. Real interest rates matter first: silver pays no yield, so when inflation-adjusted bond yields rise, holding the metal costs more in lost income. A stronger dollar also pushes the price down, because silver becomes more expensive for buyers paying in euros, rupees or yuan.

Industrial demand is the third force, and it ties silver to the business cycle. Solar panel production has become one of the largest single sources of demand. When purchasing managers report falling orders, silver often drops faster than gold.

Supply adds a twist. Around 70% of mined silver comes out of the ground as a by-product of lead, zinc, copper and gold mines. A higher silver price does not quickly bring more supply, because those mines expand or shut down based on their main metal.

Why Is Silver Important for Traders?

Silver amplifies whatever the precious metals complex is doing. In March 2020, the metal fell from about $18 to below $12 in roughly two weeks as funds sold anything liquid, and the gold/silver ratio jumped to a record above 120. By August 2020, silver traded near $29, more than doubling from its low while gold gained about 40%.

That volatility is the main risk. A move that barely registers in gold can trigger a margin call in silver, and daily swings of 5% or more are not rare. Position size needs to reflect that, not the size you would take in gold.

History also shows how a small market can be cornered. Nelson Bunker Hunt and William Herbert Hunt accumulated silver and futures contracts until the price rose from about $6 an ounce in early 1979 to nearly $50 in January 1980. COMEX then restricted new purchases, the price collapsed, and on 27 March 1980, “Silver Thursday”, the brothers failed to meet a margin call. A US jury later found that they had conspired to manipulate the market, and the case still shapes how the CFTC watches large positions.

Silver vs. Gold

Gold behaves more like a currency, while silver sits halfway between a currency and an industrial metal. For a portfolio, that means silver is a weaker safe haven in a sharp downturn but can outperform gold once growth and inflation pick up together.

Key Takeaways

• Silver is both a monetary metal and an industrial input, so its price responds to economic growth as well as to real interest rates and the dollar.
• The gold/silver ratio shows how many ounces of silver buy one ounce of gold, and traders use it to judge whether silver is cheap or expensive relative to gold.
• Silver’s smaller market makes it more volatile than gold, so the same news produces larger percentage moves in both directions.
• Most silver is mined as a by-product of other metals, which means higher prices do not quickly bring new supply.
• In a sharp downturn silver often falls with industrial metals before recovering, which makes it a less reliable safe haven than gold.