Meet the «White Gold» of the Market – Silver

Nowadays, commercial demand for silver tackles between its industrial and jewellery metal statuses. Together with gold, silver assets are used as goods, securities, means of mutual settlements and accumulation/savings, and are also considered a universal indicator of market sentiment.

The precious metals market is relatively narrow, but there will always be a steady flow of money in it, guaranteeing high volatility. Today, those who invest in a silver go ahead of the crowd, and to keep up with them, let's get started.

Some general information

By the mid-90s of the XX century, about 630-640 thousand tons of silver was accumulated in the world. The bulk (550 thousand tons) stands in jewellery and decorative items, table silver and church utensils; about 45 thousand tons are in bullion, and about 40 thousand tons are in the form of coins and awards.

In addition to the centuries-old history of use as money, silver is the second most valuable natural resource (after oil, of course!).

Commercial demand for silver remains the main factor in the bull market for precious metals, including gold and palladium. Silver is quite resistant to all forms of crises since it is used in the form of raw material in medicine and high technology (65% of commodity circulation), but as a rule, in mini- and micro-volumes per unit of output.

It means that the demand/supply balance is controlled precisely by industrial consumers, who, in case of shortages, will be forced to pay any price formed by the market.

If most of the mined gold is kept in bullion of bank vaults, there is almost no silver (as a foreign exchange reserve) there. Today, primary silver mining covers only 58% of the required consumption, and the secondary turnover of this metal is practically absent.

What is the result? Vast amounts of silver are constantly being withdrawn from circulation and can be returned neither to production nor to the financial market.

Export-import of Silver in the world

Silver: export-import

An important factor in the dynamics of silver prices remains the cost of production: according to the Silver Institute, for more than 5 years the average value of costs has been reaching about $10/toz, and there is no tendency to decrease.

Although market prices are above this level, most mining companies report as unprofitable. Mainly because along with silver, these companies also extract other metals, which is not directly reflected in the financial statements. The supply deficit in 2019 is estimated at about 1 billion toz (33.1 thousand tons).

Silver Resources by all countries of the world

Silver: stocks and seasonal dynamics

Features of fundamental analysis

The main market operation center of precious metals is the London Metal Exchange, where silver fixing is still held twice a day: at 10.30 and at 15.00 GMT.

The price in dollars per troy ounce remains the base for both industrial contracts and the speculation market. The maximum liquidity of silver assets appears in between morning and afternoon fixing. Next in terms of trading volume are New York (NYMEX), commodity exchanges in Zurich, Hong Kong, Tokyo and Singapore.

The logic of working with silver assets is simple: any market problems cause investors to fear for their investments and savings. Hence, the price of precious metals is growing. During periods of stability, it decreases, as speculators focus on assets that are more volatile.

The main fundamental factors for silver assets are considered inelastic to the price. The global force majeure events (catastrophes, wars, natural disasters) have a strong influence. Political and economic events in countries that provide the bulk of production cause the speculative reaction.

Silver has been tightly linked to the US dollar historically, so it is influenced by the political situation, economy and US statistics:

  • Fed interest rate;
  • indicators of unemployment, inflation, industrial production;
  • GDP dynamics;
  • trade balance;
  • the American stock market: when stocks fall, silver becomes cheaper, when they grow — it strengthens.
XAG: DXY Futures Correlation Analysis

Silver and dollar index

Besides the correlation with the dollar, trading silver assets are historically associated with the oil rate:

XAG: Analysis of Correlation with WTI Futures

Silver and Oil

The silver assets have the strongest “historical” correlation with their “older brother” - gold:

XAG: Spot Gold Correlation Analysis

Silver and Gold: Correlation

Features of technical analysis

Silver assets are quite volatile with the daily range at 400-500 points. Medium-term trends live for about a month.

The exchange volume of silver is 1 troy ounce (31.01 g); in one standard trading lot of 5000 ounces and it costs about $140 thousand. A decent deposit is required for operations with a full lot, although it is still less than needed for gold.

Current correlation and XAG volatility

XAG: correlation, volatility, derivatives

As a rule, the Forex terminal offers silver trading in the form of a contract for difference (CFD): XAG/USD, XAG/EUR, sometimes XAG/GBP, crosses with other currencies are almost not used. On a CFD-silver, due to leverage, one can split a trading lot, for example, at 1:500, $300-500 will be enough.

It is possible to work with silver futures or options - you just need to provide a higher deposit. Permanent spreads are usually in the range of 2-4 points, but floating spreads can expand up to 10 points.

Silver: Forex Assets

In general, all silver assets are well predicted by standard technical analysis (see Using Indicators). Operations on CFD-metals are carried out similarly to currencies. Therefore, all types of long-term and medium-term strategies are applicable: at moving average, strong price levels, graphic patterns (see Using Graphic Tools).

Scalping is not contraindicated, but we would not recommend it.

XAG: Analysis of correlation with USD/CAD

Spot-Silver and USD/CAD: correlation

We remind you: only tick data is visible on Forex, therefore, to work with methods such as VSA, you need information about real exchange volumes.

Trading silver requires confidence and patience to withstand deep stops and corrections. For these assets, it is considered normal to knock down stops in the range of 70-150 points, and ultimately close the day in the range of 2-3%.

These assets are not the best choice for beginners, but you can get the first successful trading experience on the commodity market on mini-lots and on a demo account.

Silver Investments

Precious metals have always been considered less politicized assets. Therefore, to invest in them is regarded as an effective hedging instrument.

Investments in the so-called “silver miners” are considered stable: ETF funds with silver assets or shares in mining companies specializing in silver.

A paper contract is a financial document that is not necessarily secured by real silver bullion. That is why it is possible to invest in speculation with silver since “paper silver” influences negatively on the price of industrial silver.

The funds sell “silver certificates” to the combined accounts, which significantly exceed the volume of physical silver. Hence any short position opened by such participants puts pressure on the price of silver in the free market.

Another excellent speculation tool: derivatives futures on silver, which also replace the physical metal with securities. The volume of short positions in the futures market constantly exceeds the volume of physical silver that can be really delivered on-demand. This also inhibits price growth.

Today, the silver leasing mechanism is actively working: assets are loaned for use in any form, including for production, thereby charging a commission. Shortages of physical metal, which the creditor will continue to rely on, is another form of a reduction in the supply of physical metal.

Silver price dynamics

Silver: price history

If the downward trend continues, silver mining will become less and less profitable. Companies will be forced to either reduce quarry and preserve production or begin to accumulate stocks for a subsequent sale in a more favorable market situation.

The extraction and exploration of new silver reserves are now considered expensive, and large companies are not yet interested in this. But at some point, the supply deficit will end (or the reserves will be exhausted, or suppressing factors will weaken) and the price of the metal will have to rise to a more “fair” market price, which is now estimated by analysts at $35-40/toz. Thus, we are waiting for a confident bull market.

Try It Yourself

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.

The testing of this currency feature was arranged in Forex Tester with the historical data that comes along with the program.

To check this (or any other) feature’s performance you can download Forex Tester for free.

In addition, you will receive 19 years of free historical data (easily downloadable straight from the software).

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