Silver Trading Guide: A Comprehensive Approach

Silver is an asset that enjoys strong appeal but is also one of the most difficult to invest in. After all, it is a precious metal, and as such, it is not easy to identify market movers. Before discussing the factors that influence the price, however, it is important to explain what silver is, namely its uses, as well as the instruments that currently allow for trading it.

What is silver used for

Silver is a precious metal, and so far, no surprises there. This qualification, however, places it in a different territory than that occupied by most assets and requires a unique reasoning regarding market movers. The truth is that silver has a completely marginal role in the production context and even in the real economy. Its uses are beyond industrial and production needs, unlike - staying on the topic of metals - copper, which is essential for the construction of electrical components and more. So, what is silver used for? The answer is as trivial as possible, within reach of the common individual and in line with the collective imagination. In practice, silver is the raw material for jewelry items. A bit like gold, in fact. From an investor's perspective, it is also a safe-haven asset. Again, just like gold. Its qualification as a precious metal is given not only by tradition but also by the relative scarcity of silver worldwide. These characteristics profoundly affect market movers and market dynamics.

Instruments for silver trading

Silver generally appears as an underlying asset. The alternative would be to hold it physically, but in this case, two problems would arise: the storage of silver and the slowness of transactions. To safely store silver, a safe or, better, the contribution of organizations (e.g., banks) specialized in this activity is necessary. If one were to trade in physical silver, then one would have to deal with the movement of the asset, and it doesn't take an expert to understand how impractical this approach is. Therefore, the vast majority of those who trade silver never see a bullion, even from a distance, but instead use derivative instruments. Which ones? The classic ones, there are no surprises in this regard. The most widespread, precisely because they are supported by most brokers (especially if they are market makers), are Futures, CFDs, and Vanilla Options. Futures are actual contracts that require a transaction between two parties, which will occur at a predetermined date and price. Born as a tool to protect capital from volatility, they have become the object of trading. In particular, Futures, being regulated, enjoy a standardization that favors traders. CFDs, an acronym for Contract For Difference, are instruments similar to Futures. They too are effectively contracts that bind two parties to a transaction, to be executed at a predetermined date and price, regardless of the price that the asset in question will have at the time of expiration. However, the differences are numerous and stem from the "unregulated" nature of CFDs. These are instruments that are traded Over The Counter, similar to what happens in Forex. This means that there is no standardization, and the parameters (such as price and expiration) are the result of negotiation between the parties (often the user and the broker). Being more flexible, CFDs have lower commissions, higher spreads, and higher leverage. Vanilla Options are governed by a similar mechanism, but they are more versatile because they do not require the execution of the transaction. Hence the term "option". They are considered by most as a tool for capital protection, therefore in a medium-long term perspective, but in recent years, they have become the object of desire for an increasing number of traders.

Silver market movers

We have explained the uses of silver, framing the asset from a practical point of view. We have talked about the instruments available to traders. We can now proceed with the description of market movers, which are really many. Their number makes trading with silver quite complex and requires the possession of skills and interpretation abilities. The starting point is always reasoning based on the law of supply and demand; each event must be revisited from this perspective. In any case, here is a complete but exhaustive list of silver market movers. Emergence or development of new technologies. We specified at the beginning of the article that the use of silver has little to do with production contexts. In a nutshell, its industrial uses are extremely limited, so it should be considered exclusively as a precious metal. But if this is the current situation, it is not necessarily the same for the future, near or distant. Technology is constantly evolving and may require intensive and markedly industrial use of silver in the future. From this point of view, the advice is to keep an eye especially on photovoltaics, which already today requires silver for the construction of solar cells. It goes without saying that if the industrial use of silver increases, demand increases, and the price is pushed upwards. Real economy. The fact that "concrete" applications of silver are scarce does not exclude that the real economy can influence its price. On the contrary. Obviously, one needs to look at those parameters that capture the country's wealth and, in particular, people's purchasing power. If this power increases, the demand for so-called superfluous objects also increases, including jewelry, which is also made of silver. The parameters to keep an eye on are the unemployment rate, wages, sales, and, in general, GDP. Currency risk. Here we enter a different territory, more familiar to investors. This perspective considers silver as a safe-haven asset, that is, as an asset to invest in if the situation elsewhere is not very transparent or stands out for instability. The demand for safe-haven assets, and therefore for silver, increases when currency risk grows, that is, when the relationships between currencies become more unpredictable and volatile. For example, as in the first months of 2014, when national currencies competed to devalue themselves to support exports. It is evident that devaluations erode the returns of any investment, and therefore the demand for safe-haven assets rises. Under these conditions, the price of silver rises. Strength of the dollar. We have said that silver is a safe-haven asset, but it is certainly not the only one. From this point of view, we must also look at the competition. If we exclude gold, which we will discuss in the next point, the safe-haven asset par excellence is the dollar. If the price of the dollar rises, it is perceived more strongly as such, and investors looking for a safe haven will turn to the greenback rather than precious metals, and therefore to silver. In general, the price of silver - regardless of the currency with which it is exchanged - is inversely proportional to the value of the dollar. In simple terms, if the dollar rises, silver falls, and vice versa. Price of gold. Gold is also a safe-haven asset. Indeed, it is THE safe-haven asset. It is so for technical reasons but also for cultural reasons, which have to do with tradition. In any case, it is impossible, even in moments of stagnation, not to consider it as such. However, gold and silver, rather than being in a competitive relationship, are linked by a relationship of dependence. Specifically, the dependence of the second on the first. The price of silver, in most cases, closely follows that of gold. The second most precious metal in the world replicates the price movements of gold. This is of fundamental help to the trader. It is, in fact, a link that must be exploited for analysis purposes. Interest rates. By interest rates, we mean the interest rate of the main currencies, which can play a role as a safe-haven asset, so the dollar first and foremost, but also the euro and the pound. Especially the dollar, however. In any case, when interest rates are raised, the currency gains attractiveness, precisely because the cost of money is higher, and lending it yields more. It goes without saying that if the currency is more attractive, it risks stepping on the toes of other precious assets, such as silver (the same applies to gold, of course). In short, interest rates are inversely proportional to the price of silver. If rates rise, the price of silver falls. If rates fall, the price of silver rises. Currently, all central banks are going through an accommodative phase, but they are trying to exit it very gradually. There are few exceptions, and among these is the American Federal Reserve (the monetary tightening is, however, very gradual and follows an extremely expansive policy).