How Does the Value of Silver Fluctuate?

Silver is a precious metal used as a form of currency and an asset with intrinsic stored value. It also has industrial uses, which are growing in number. Silver prices are driven by a confluence of factors affecting short- and long-term supply and demand. As with any commodity, when supply increases relative to demand, prices fall. When demand increases relative to supply, prices increase. These effects are magnified by investor actions and expectations, although in the long run, macroeconomic and structural market forces have the greatest effect on silver prices.

Demand for silver continues to increase within the industrial sector, because silver is an efficient thermal and electrical conductor and also has useful characteristics stemming from its malleability, ductility and optical reflectivity. Silver is used in batteries, solar products, computers and smart phones. Further, many of these high technology products have short life cycles, quickly becoming obsolete and ending up in garbage dumps. Few efforts are made to recycle industrial silver, which helps prop up high demand. According to the Silver Institute, growth in demand for silver between 2013 and 2018 is expected to be 27 percent. New applications for silver continue to be found, and high demand from China also drives demand, which affects prices.

Demand for silver is driven by demand for gold. Gold is often used to diversify investment portfolios, due to its negative price correlation with major asset classes such as stocks and bonds. Gold is also a hedge on falling currency values. When the market for gold strengthens, ancillary demand spills over into the market for silver, resulting in rising prices.

Historically, precious metal investors have observed pricing ratios between gold and silver, and when they observe a perceived imbalance in the ratio, this can spur buying and selling of silver. When gold prices rise, investors expect the ratio to remain stable, which implies that silver prices must rise accordingly.

Institutional investors have commodity trading desks that can influence the price of silver and other commodities. Also, a group of huge trading concerns, such as Glencore, Trafigura and Louis-Dreyfus, can influence short-term prices, in particular, as they execute trading strategies involving huge amounts of silver.

The proliferation of exchange-traded funds has generally increased demand for silver. ETFs offer individual investors liquid, low-cost vehicles for tracking indexes, a passive investing strategy that is increasingly in favor. As silver ETFs take in more investor funds, they invest it in silver. Likewise, if investors decrease their investing in silver ETFs, this can result in short-term declines in silver prices.

Macroeconomic factors such as currency devaluations and inflation can spur demand in gold and silver. Both institutional and individual investors view gold and silver as safe stores of value relative to fiat currency, which derives its value from nonintrinsic sources such as government backing.

When the value of the U.S. dollar declines, silver's price tends to rise. Silver supplies also affect price, and mining and production efforts are especially responsible for short- and medium-term price swings. Investors follow production closely; when it falls, investors speculate on price increases, and such speculation can cause the price to increase due to an increase in the short-term demand for silver contracts. In the medium term, lower production also decreases supply relative to demand, which further boosts prices. However, when prices rise, producers with higher production costs begin mining again at idle facilities, increasing supply and reversing the price increase.