Nicole WillingThe silver price spiked at the start of September, approaching its highest level in a month, but it failed to hold onto its gains and quickly slipped back.
Silver traded up from $23.84 on 2 September to $24.80 on 6 September, but it was back to the $23.80 level ten days later.
The metal reached an eight-year high in February 2021, hitting the $30 per ounce level for the first time since 2013, but the commodity has struggled to find support since. The price fell sharply in June and again in August, as the US Federal Reserve (Fed) indicated that it could begin tapering its monetary stimulus measures by the end of the year. The silver price has fallen by around 14.5% year-to-date, having lost 6.3% in August alone, to trade around the $23 per ounce level at the time of writing, 17 September.
What has prevented the metal’s price from breaking out despite the continued economic uncertainty that would typically be expected to lift precious metal prices? What are the main drivers for the market and what is the outlook for the rest of the year?
Current silver price and major drivers
As with gold, the silver market is widely seen as a safe haven investment that acts as a portfolio hedge against economic uncertainty or weakness. By holding commodities like precious metals, investors can hedge their portfolio against a drop in the value of stocks and bonds, as can happen during a recession. Silver is a store of value and has been used to make physical coins throughout history.
The silver price initially dropped in March 2020 as investors sold off assets and liquidated positions to fill margin calls. But the market quickly rebounded as safe haven demand for silver took over following the uncertainty that arose at the start of the Covid-19 pandemic. The metal more than doubled from around $12.10 in March to reach $29.77 in August 2020, then slipped back to $21.90 in November when the first vaccines were announced, prompting optimism about the prospects for an economic recovery from worldwide shutdowns. Overall, silver gained an average of 47% in 2020 on the increase in demand from investors along with disruptions to supply as some silver mines were closed during Covid-19 lockdowns.
Silver spiked again in February, as retail investors piled into the market, expecting the price to move up in response to rising inflation following economic stimulus packages issued to encourage recovery from the pandemic. But expectations of global recovery and concerns about the result of monetary tightening from the US and other central banks have limited gains in 2021. The meeting of the US Federal Open Market Committee (FOMC) in June weighed on precious metals prices as the central bank indicated a more hawkish stance than the market expected on the potential for lifting interest rates.
This makes investing in silver an important way for investors to manage their portfolio in light of macroeconomic factors that affect the performance of the global economy.
Physical consumption
Unlike gold, which is predominantly used in jewellery and as an investment asset, more than half of the annual demand for silver comes from industrial uses. Silver is malleable, making it ideal for forming into jewellery, but it is also a good conductor of electricity and is therefore used extensively in electronics.
The varied uses for silver across a range of industrial applications have an effect on the silver price – when manufacturing activity rises, the price increases due to high demand, while a fall in activity, such as during a recession, pulls the price lower.
For that reason, monthly manufacturing purchasing managers’ index (PMI) data from around the world is an important gauge of silver demand, as it provides an indication of industrial activity.
The global PMI compiled by JP Morgan and IHS Markit fell to a six-month low of 54.1 in August 2021 from 55.4 in July as output growth lost momentum in several major markets (a number above 50 indicates an expansion in manufacturing activity, while a figure below that figure points to a contraction). So while the global MI lost ground, by remaining above 50 in August, the PMI recorded a 14th month of recovery.
The transition to clean energy around the world is expected to drive physical demand for silver in the coming years - for example, in the production of electrical connections in electric vehicles. Solar panels accounted for an estimated figure of around 20% of industrial demand for silver this year, according to data compiled by Metals Focus for the Silver Institute. Demand from the solar sector rose by 4% in 2020 even as overall silver demand fell by 10% to 896.1 million ounces, reflecting the impact of the pandemic on industrial consumption. Industrial silver demand dropped by 5% to 486.8 million ounces, a five-year low.
The rollout of fifth generation (5G) telecom networks is also set to become a growing source of demand in the future, as silver is used in telecom equipment.
Mining production
Silver is usually mined as a by-product of gold, copper, zinc and lead. Primary silver production accounted for only 27% of total output in 2020, according to the Silver Institute. This means that supply doesn’t always respond to market fundamentals because silver production can fall even if demand for it rises. This occurs if prices of the metals that are being primarily produced at mines where silver is a byproduct decline and vice versa.
Silver mining output fell by 5.9% to 784.4 million ounces in 2020, its fourth straight year of drops and the largest decline in the past ten years. This was because of temporary mine closures during pandemic-related lockdowns.
Mexico is the world’s largest silver producer, accounting for almost 23% of global supply. Production was suspended in Mexico in April and May 2020, contributing to the tightening in global supply. Production also fell in Peru, the world’s second-largest source of mined silver, while Chile increased output with a shorter suspension.
The supply of silver from the mines around the world affects the price as in other commodity markets, with lower supply supporting higher prices and increased supply weighing on the market. After falling by 6% last year, mined supply is projected to increase by 8% in 2021 to 848.5 million ounces, according to the Silver Institute data.
Investment demand
Silver’s status as a safe haven commodity makes demand from investors a key driver of the price. This was seen in 2020, when the price of silver rose despite a fall in physical demand that outpaced the reduction in mined supply.
Net investment in exchange-traded products (ETPs) for silver soared by 298% in 2020 to 331.1 million ounces, according to the Silver Institute, and global holdings climbed above one billion ounces for the first time since the first ETP was launched in 2006.
Investment demand for silver is driven by factors like the value of the US dollar, interest rates and inflation, as well as geopolitical developments, allowing investors to take a position on the health of the global economy and diversify their portfolios.
Low interest rates and a weaker US dollar make silver more attractive as it holds its value as an asset, whereas a stronger dollar and higher interest rates make silver less attractive as investors do not receive interest on their holdings. Some investors opt to buy silver rather than gold as it is more affordable, particularly if they are buying the physical metal.
Analyst commentary
Analyst | Date | Comment |
Heraeus Precious Metals | 6 September 2021 | “Semiconductor problems restrict electronic demand growth for silver this year. On the plus side, smartphone sales volumes continued to rebound in Q2 2021. However, the chip shortages suffered by the automotive industry and some other electronics segments mean that while higher electronic demand of around 315 million oz is expected this year, the recovery has not been as strong as initially predicted.” |
StoneX | 13 September 2021 | “Given the environment, with gold essentially trading sideways, silver is underperforming, with the ratio now at 75.6, up from 73.7 a week ago. This makes sense, since silver, with a lack of guidance from gold, is looking at the industrial outlook and the virus-driven uncertainty is keeping sentiment neutral to mildly bearish. There is a substantial amount of pent-up demand waiting in the wings in India in particular, but the market is still very cautious. The shortage of shipping capacity is also keeping silver on edge as some shipments are now having to go by air.” |
TD Securities | 13 September 2021 | “Fedspeak is shrugging off the disappointing payrolls report and continues to suggest that conditions for tapering could be met this year. In turn, silver prices are underperforming gold, as the market correctly anticipates that tapering should also sap a critical driver of the demand for all collectibles — including the retail demand for bullion and coins that has provided exceptional support to silver this year. At the same time, while silver prices have collapsed nearly 20% from the failed #silversqueeze, ETF holdings of silver have just managed to shed the accumulated length over those few sessions ... Our ChartVision framework argues that gold prices need only breach $1870/oz by year-end for an uptrend to form, while silver would need to break north of $27.40/oz. In turn, we entered into an inverse-vol weighted long-short position in gold/silver, expecting the yellow metal to outperform silver in the coming months.” |
Zaner | 14 September 2021 | “Recent action indicates signs of inflation prompt tapering views which in turn have undermined gold and silver prices… The silver trade has a different focus than the gold trade with the ebb and flow of physical demand likely dominating daily action in the coming trading sessions… Silver should have enough fundamental base to hold prices well above the very key mid-August consolidation lows, down at $22.97.” |
Analysts at clearing firm and liquidity provider Sucden Financial said in their third-quarter report: “We believe there is still upside potential for silver's performance during the second half of this year based on continued recovery in industrial performance alongside raised inflationary levels.
Analysts at Jefferies have a base case forecast for silver in which the long-term price averages $20 per ounce, an upside scenario in which it reaches $35 per ounce and averages $30 per ounce over the long term, and a downside scenario in which silver declines to $15 per ounce with no improvement thereafter.
Should I buy silver?
There are several reasons why investors opt to gain exposure to the silver price in their portfolios.
Hedge against falling stocks and bonds
Investors traditionally hold a small proportion of their portfolios in gold and silver as a way to hedge against volatility in the prices of other assets. Gold and silver can hold their value even as prices for stocks and bonds fall during recessions and periods of economic uncertainty.
Long-term demand growth
Long-term trends like the transition to solar electricity generation, electric vehicles and 5G telecom networks are expected to increase demand for silver through the production of solar panels, electronics and electrical components. This could tighten the supply/demand balance and result in the silver price trending higher over the coming years.
Declining mine supply
At the same time, as demand is expected to rise, long-term supply of silver from mining is projected to drop because of declining grades of ore that will result in lower rates of silver recovery from mines. There is a lack of new mining projects expected to start operations in the next few years, and new deposit finds can take decades to enter production.
High liquidity
As one of the world’s most actively traded commodities, it is easy to trade physical silver or invest in silver mining stocks and funds whenever you wish to enter or exit a position. Tight bid-ask spreads – the difference between the lowest price a seller will accept and the highest price a buyer will pay – mean that investors can always buy and sell close to the market price.
Should I sell silver?
There are also reasons why investors might want to limit their exposure to silver or even sell short.
Monetary tightening
The short-term outlook for the silver price has become increasingly uncertain in 2021. While traders and investors have expected the price to extend the eight-year rally seen early in the year as a result of rising inflation and continued uncertainty surrounding the Covid-19 pandemic, the price has come under pressure. The retreat in the silver price has been driven by concerns that the US Federal Reserve and others such as the European Central Bank (ECB) could raise interest rates sooner than previously expected, which would reduce investment demand for precious metals.
Market volatility
While silver trades at much lower prices than gold, the price is far more volatile. This may not be suitable for investors looking for stable investments for their portfolio. Sharp price swings create opportunities to make large profits, but they also increase the risk of large losses.
Big backers and holders of silver
Thomas Kaplan, Founder, Electrum Group
An investment in silver helped to make Kaplan a billionaire. Electrum Mines controls mining facilities with resources worth more than one billion ounces of silver. Kaplan sees the potential for the silver price to rise to $100 over the long term. He told Kitco in December 2020:
Warren Buffett, co-founder, Berkshire Hathaway
Billionaire investor Warren Buffett’s fund Berkshire Hathaway bought 129.7 million ounces of silver in 1997 and early 1998, betting that a decline in inventories with demand outpacing production and recycling would only be addressed by a rise in the silver price.
Buffett said in his 1997 letter to shareholders:
Berkshire Hathaway sold the holdings in 2006, at a substantially higher price.
JP Morgan
US investment bank JP Morgan holds one of the world’s largest stockpiles of silver. Data from the COMEX futures and options market shows that JP Morgan holds around 50% of the physical silver bullion stocks held in the exchange’s warehouses, amounting to around 184.5 million ounces. With silver trading around $23.50 per ounce, the stock was valued at around $4.3bn.
Silver price history
Silver has been mined and used to make coinage for millennia. The centre of world production moved from Turkey and southern Europe to Latin America after the discovery of the metal by European explorers. Bolivia, Peru and Mexico accounted for more than 85% of worldwide silver production between the 16th and 19th Centuries.
Production continued to expand, and industrialisation increased the uses for the metal. Production in the last 25 years of the 19th Century quadrupled from the first 75 years to total nearly 120 million ounces each year. Global production increased by a further 50% in 1900-1920, to around 190 million ounces following new discoveries of silver reserves in various countries in the Americas, Europe and Asia.
The 1900s also saw the development of new mining techniques that increased the efficiency and yield of mining sites.
The silver price graph shows that the market spiked in the aftermath of the US Civil War, as an increase in currency supply to finance the war increased the attractiveness of gold and silver.
The crash of 1929 and subsequent Great Depression saw the value of silver fall to a record low of $0.25 per ounce in 1932 and 1934. But it soon rebounded, and the oil crisis in 1979 prompted a commodity price rally that saw silver rocket in value from $5 per ounce to a record high of $49 per ounce. The silver price set a new high above $49 per ounce in April 2011 in response to a US debt ceiling crisis.
The market subsequently retreated, before the impact of the Covid-19 pandemic prompted the silver price to spike to an eight-year high above $30 per ounce in February 2021.
Profile
Although it has not been used as a currency in the same way as gold, silver has been used as coinage for centuries and still carries value as a precious metal. Investors can choose to buy physical silver coins and other forms of bullion, or they can invest in financial assets such as exchange-traded funds or the stocks of silver mining companies. Silver is also valued for jewellery production.
Silver is also used far more extensively in industrial products than gold, making silver investing a key method for investors to gain exposure to global manufacturing activity in their portfolios.
Investing in silver allows investors to hedge their portfolios against low interest rates and a fall in the value of the US dollar, as silver tends to hold its value over time and is viewed as a safe haven investment.
Traders and investors often look at the gold/silver ratio – the number of ounces of silver needed to buy an ounce of gold – to determine whether silver is considered to be undervalued or overvalued at any given time.
The silver market is expected to tighten over the long term, as demand for solar panels – which already account for a large share of consumption – is expected to rise with the push to reduce carbon emissions around the world. Silver is also used in larger quantities in electric vehicles and 5G telecom networks than in fossil fuel vehicles and previous generations of telecom equipment.
How to trade silver with CFDs on Capital.com
What do you think, will the silver price rise or fall? You can start trading the metal with contracts for difference (CFDs) on Capital.com today.
CFD trading gives you the opportunity to try to profit from both positive and negative price fluctuations. You can either take a long position, speculating that the silver price will rise, or a short position, speculating that the price will fall.
As a leveraged product, CFDs are designed to maximise gains, which can be large on volatile assets such as commodities. However, you should be aware of the high risk involved because leverage also magnifies losses should the asset price moves against your position. Do your own research and use risk management tools, such as stop-loss orders, to mitigate the risks.
Check Capital.com’s comprehensive guide to make sure you understand what CFDs are, how they work, their advantages and the risks they carry, as well as trading strategies for both professionals and novices alike, before you get started. If you wish you can create an account at Capital.com and follow the latest silver news, analysis and forecasts to spot the best trading opportunities.
Why trade silver CFDs with Capital.com?
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Trading the difference: when trading silver CFDs, you do not buy the underlying asset itself, meaning you are not tied to it. You only speculate on the rise or fall of the metal’s price. CFD trading is nothing different from traditional trading in terms of strategies. A CFD investor can go short or long, set stop and limit losses, and apply trading scenarios that align with their objectives.
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Edited by Valerie Medleva
