How is Silver Priced?
As a precious metal, silver finds itself in an elite group that includes gold, platinum, and palladium.
Silver has been used by humans for over 5000 years and has had many different uses over that period. The two main ways that silver has been used throughout human history are in currency and jewellery.
In ancient times, the low structural strength of Silver made it a poor choice for any craft or industry that required tensile strength. It was not until the relatively recent last 150 years that advancements in science allowed manufacturing to take advantage of silver’s specific properties.
These modern uses of Silver have affected its price as technologies have changed; more on that later.
What Drives the Silver Price?
How is Silver priced? The factors that help drive the price of Silver and how the price is arrived at in today’s interconnected world lays a foundation for understanding this precious metal.
Many factors drive the price of Silver, and often some of these forces work against each other. Therefore, the pricing of silver requires an understanding of those underlying forces.
Understanding these factors and how they relate to each other helps decide whether it is the right time to either enter or exit the market as the price fluctuates.
Supply & Demand drives the Silver Price
Supply and demand is one of the most important driving factors for any product anywhere.
Silver supply has been rising over the years, especially between 2005 – 2020. Global production in 2005 was approximately 20,800 metric tons/year. By 2020 this number had increased to 25,000 metric tons/year.
Demand for numismatic, bullion and jewellery has remained consistent for many years. It is the expansion in industrial use that primarily affects the need.
Up until the late 1990s, one of Silver’s most important industrial uses was developing photographic film. Other uses were waiting in the wings, ready to appear on the global stage. Almost overnight, people stopped using cameras with film and moved to digital cameras, putting a dent in the worldwide demand for Silver.
Many green technologies are being developed, using Silver for its physical characteristics. Future uses that have yet to be scaled up will help drive up the price and the demand for Silver. One that is set to explode is the production of solar photovoltaic panels.
As the price of Silver rises, it attracts more and more sales of scrap silver, be it jewellery, coins, or other forms. This increase in the supply, in turn, dampens Silver’s value.
When there are more sellers than buyers, the price will inevitably fall.
The inverse is true when prices are low. There is little motivation for scrap to be sold at a loss in the open market: then, as supply thins out, the silver price is driven upwards again, as demand returns.
The economy plays a significant role in the demand for silver products. When economic conditions are strong, people tend to have more disposable income, which they are happy to spend on silver-based products like jewellery, watches, coins, or bullion.
As economic conditions suffer a downturn, non-essential purchases are often the first to be postponed until better times return.
On a macro-economic scale, Silver, like gold, is perceived to be a risk-free investment, especially in times of turmoil. This perception means that these two metals are less likely to lose value in turbulent times. They may not make huge returns; however, they will not suffer losses other assets or commodities might. Silver is perceived to be a preserver of wealth.
If you have a traditional savings account, gains are depleted by the age-old nemesis: inflation. Silver provides insurance against inflation even when economies fall into a state of hyperinflation. As inflation occurs, the price of Silver has historically adjusted. This hedge has been a long-used form of protection against inflation and further proof that having a fully diversified portfolio will benefit investors in the long run.
The Gold-Silver Ratio
There has always been a correlation between gold and Silver. Generally, the two metals tend to move in tandem, with gold the leader and silver lagging price movements. Professional analysts and traders that study this ratio use it to look for trading indicators. It is considered one of the more sophisticated fields of technical analysis.
Government Policy & Usage
Like gold, many governments around the world have central banks and strategic holdings of silver. They also issue national and numismatic coins that are bought by investors and collectors around the globe.
Investors favour national coins such as the Canadian Maple Leaf that maintain the same design year after year.
Numismatic coins have many different designs with much shorter production runs. These tend to be purchased more frequently by collectors than investors as they cost more because the price of fabrication is higher for smaller run lots.
The oldest currency still in use today is the British Pound Sterling. Even though it has been decoupled from precious metals since 1931, each banknote still reads: “I promise to pay the barer on demand the sum of”. In theory, one could take a 5-pound note to Bank of England and ask to be reimbursed in Silver, however you probably would not receive a warm reception.
Each factor affects each other, often pulling in separate directions, which can make the price of Silver extremely volatile at times.
How is the Price of Silver Determined Today?
Silver is traded in many secondary and even tertiary markets today. These markets may provide liquidity and local pricing but generally will not play a prominent role in the global price of Silver.
Two primary exchanges lead the way in setting the price of silver. The London Bullion Market Association (LBMA) and the COMEX market in New York City are highly respected markets and play similar roles. Together they are where most global trades, by volume, settle.
Silver trading has been happening in London for centuries due in part to the history of British colonialism and London’s geographical location.
Over time the sophistication of silver trading has evolved and grown, as has the volume of trades.
The Bank of England established the LBMA in 1987. It was an amalgamation of the London Gold Market and the London Silver Market that had their origins in the 19th century.
Currently, the LBMA membership consists of 75 full members, 58 affiliate members and 12 market makers from 23 different countries. These members represent traders, refiners, assayers, dealers, fabricators, miners, banks, dealers, exchange-
Trading silver at the COMEX is done using futures contracts, a legally binding agreement to buy or sell a set amount of a certain quality of Silver at a specific point of time in the future.
Anyone on the planet that opens a futures trading account with a brokerage firm can gain access to trading Silver at the COMEX. Trades at the COMEX are matched electronically.
You can place an order to buy or sell at a specific price or trade at the market price. If a buy order is placed at the market, the price paid will be the lowest sell offer. A market sell order will be the opposite; the trade is executed at the highest offer to purchase.
Unlike London, most of the COMEX trades do not settle with the physical delivery of Silver. They are instead offset before their settlement date comes due. Only about 2% of futures contracts result in the physical delivery of metals. This makes futures an easy way to lock in a price to offset a physical delivery trade.
COMEX silver is priced in US dollars (USD) and cents per troy ounce. Trading lots are set to 5000 troy ounces. Daily trading volumes tend to range between 40,000 and 80,000 contracts.
As the COMEX price floats freely and can swing up several percentages in any given day, people that have exposure to it tend to follow it more closely than the London fix price.
These two exchanges lead global pricing, which the world turns to for price data. Many small to medium-sized businesses have silver exposure but would not possess enough to gain access to London or New York markets.
The Silver Fix
The price of Silver is fixed once a day at 12:00 noon at the LBMA. Until 2014, this process was conducted over a conference call, but a new system was devised due to concerns about transparency.
They chose an electronic pricing platform that was provided by the Chicago Mercantile Exchange (CME), which Thomson Reuters administer. This new system is an auction-based platform that matches buying and selling orders until a benchmark price is arrived, called the silver fix. All auctions are visible on the platform to market participants.
Pricing is in USD and cents per troy ounce of Silver. Trading lot sizes are called lakhs (100,000 troy ounces) and quarter lakhs (25,000 troy ounces).
Silver trades conducted in London are priced at the fix for the day they are established. London trades are primarily done for physical deliveries of Silver.
When buying or selling physical Silver, the quoted price should be based somewhere close to the COMEX price levels. Look for dealers that provide a tighter spread between their buying and selling prices.
Of course, the volume of metal being traded will affect the offered price. Smaller amounts tend to have a wider spread than larger amounts.
Jewellery or ornamental Silver tends to be priced higher than an equivalent bullion weight. This premium represents the fabrication costs associated with making such items. All kinds of businesses such as retail precious metals brokers, jewellers, dentists, recyclers, and many others use Silver in their day-to-day activities. Having a trusted provider is the most critical part of the equation.
There are many influencing factors in which dictate the price of Silver. Primarily, when it comes to products including assets or commodities such as gold and Silver, supply and demand remain a unilateral force in pricing.
Prices are then determined and maintained by major institutions such as the LBMA and the COMEX, which provide universal pricing for precious metals markets.
The price of Silver is continuously fluctuating; however, as industrial and technological needs for Silver grow, the supply will decline. It is essential to research before investing. Understanding the driving factors of silver pricing will help better a profitable investment.