Learn How To Trade Silver

Commodity.com Guide to Gold Trading

Why is Silver Valuable?

Silver is a shiny white metal with several extraordinary characteristics.

It is malleable, pliable and beautifully lustrous. Silver is also highly reflective and conducts electricity extremely well. It even kills bacteria. All of these features make silver a valuable metal in a diverse array of industries including jewelry, electronics, energy and medicine.

Yet these characteristics only scratch the surface of why silver is important in the global economy. Silver is very rare and, along with gold and six platinum group metals, belongs to a group known as precious metals. For thousands of years people have acquired silver as an investment and store of value.

When Did Silver Mining Begin?

Silver mining began when ancient civilizations in Asia Minor first mined the metal over 5,000 years ago.

Almost 1,800 years later, the Greek Empire began mining silver as a currency, and during the height of the Roman Empire, silver became an essential trading commodity along the Asian spice routes.

The Spanish conquest of the New World in the 15th century, however, proved to be the most pivotal moment in the history of the commodity. Dramatic increases in silver mining in Bolivia, Peru and Mexico occurred between 1500 and 1800 AD. These three nations accounted for 85% of the world’s production as the Spanish gained a foothold in the Americas.

Since then, new discoveries in the United States, Australia, Central America and Europe bolstered production worldwide.

How Much Silver Has Ever Been Mined?

Despite the long history of silver mining, production and reserves of the metal are surprisingly limited.

A 2004 report by the US Geological Survey estimated the total amount of silver mined from antiquity through 2001 at 1.26 million metric tons. Half of that production was mined in the past 62 years.

More recent estimates place the total quantity mined in history at 1.5 million metric tons, which equates to only a 52 meter cube of the metal. 

All the silver ever mined and lost if it were melted into a cube.

All the silver ever mined and wasted if it were melted into a cube. Demonocracy

Where Does Silver Come From?

Silver is rarely found in the earth crust as a native element. Instead, miners usually find the element as a byproduct of mining for lead, zinc, copper or gold.

Recent production of silver has declined as a result of a drop off in lead, zinc and gold production. 

Top 10 Silver Producing Countries

RankFlagCountryAnnual Production (millions of ounces)
#1Flag of MexicoMexico186.2
#2Flag of PeruPeru147.7
#3Flag of ChinaChina112.4
#4Chile FlagChile48.1
#5Flag of RussiaRussia46.6
#6Flag of AustraliaAustralia43.6
#7Bolivia FlagBolivia43.5
#8Poland FlagPoland38.5
#9Flag of USAUnited States of America35.4
#10Argentina FlagArgentina30.0

Which Countries Have the Largest Silver Reserves?

Silver reserves are a measure of economically minable silver is in the ground. However, mining is an expensive endeavor, so ultimately the price of a metal determines whether it is feasible to mine it.

Top 5 Countries by Silver Reserves

RankCountryReserves (in Thousands of Metric Tons)
#1Peru120
#2Australia89
#3Poland85
#4Chile77
#5China39

Top 3 Uses of Silver

Use of SilverDescription
Jewelry
Silver is beautiful, lustrous and workable. It is, therefore, a popular choice in earrings, necklaces, bracelets and rings. Most jewelry manufacturers use sterling silver, which is 92.5% silver and 7.5% copper.
Technology
Silver is used in a variety of technologies:

Electronics: Silver has excellent electric conductivity, which makes it a natural choice in printed circuit boards, switches and TV screens.

Solar: Ground silver powder is used to produce solar cells.

Catalysts: Catalysts help chemical processes occur. Silver’s unique chemical properties make it an important catalyst in the production of ethylene oxide and formaldehyde.

Brazing and Soldering: Silver is used to strengthen connections of pipes, faucets, ducts and electrical wires.

Ball Bearings: Silver electroplating helps strengthen ball bearings.

Medicine: Silver functions as a biocide and kills harmful germs.
Private Investors
Silver Money
Individuals and investment funds purchase silver to protect their portfolios against losses from inflation and market crises. Investors purchase silver bars, coins and funds that invest in the metal.

Ready to Start Trading Silver?

Our recommended brokers for trading silver are:

What Drives the Price of Silver?

Silver is a volatile commodity that reacts to both industrial and economic data. These factors are the most important drivers of silver prices:

  1. Supply and Demand
  2. Silver Scrap Metal
  3. Industrial Demand
  4. Inflation and the US Dollar
  5. Gold Prices

Supply and Demand

The supply and demand equilibrium for silver is an important factor that drives its price.

Silver supply is limited, and production has been declining in recent years. Industry experts expect further declines in the years ahead due to higher mining costs. 

At the same time, demand for silver, 50% of which comes from industry remains stable.

Investors should pay attention to events that impact the supply/demand equilibrium. For example, mining strikes could constrain supply, while discoveries of new silver deposits could increase it. On the demand side of the equation, changes in trader appetite for silver, which is much more volatile than industry demand, could move prices.

Silver Scrap Metal

Silver scrap metal can play an important role in determining the supply of silver in the market and, therefore, its price.

One source of scrap metal historically was the photography industry. However, with the advent of digital photography, silver now plays a minor role in the industry. Scrap dealers recycle large quantities of photographic film for their silver content.

Similarly jewelry and silverware can be source of silver scrap. As silver prices rise, more scrap supply comes on to the market, which can put a cap on prices.

Industrial Demand

The demand for silver from industry can have a big effect on the price of the metal.

As previously mentioned, the photography industry no longer consumes as much silver as it did a generation ago. Stainless steel has largely replaced silver in items such as flatware, while many mirrors now contain aluminum alloys instead of silver.

On the other hand, industries such as water purification, circuit boards and solar may continue to require silver dues to its unique physical and chemical properties.

Demand for Silver in Circuit Boards

Circuit board manufacturers using silver via Pixabay

Inflation and the US Dollar

Investing in silver is one way to protect against the loss of purchasing power from inflation and a weak US dollar.

Commodities such as silver are priced in US dollar and often have strong inverse correlations with the dollar. In other words, as the dollar weakens, silver prices tend to rise. Buyers purchasing silver in other currencies have more purchasing power when the dollar is weak and less when the dollar is strong.

Silver is also different from most other commodities (the exceptions being gold and perhaps platinum) in that many traders view it as an alternative currency. In times of currency devaluation and inflation, traders often turn to silver as a more reliable store of value.

Gold Prices

Historically gold and silver prices exhibit a strong positive relationship. Many traders pay close attention to the gold-silver ratio and use movements in this ratio as a signal to buy or sell one commodity or the other.

4 Reasons You Might Invest in Silver

Investors purchase precious metals such as silver for a variety of reasons, but the following are most common:

  1. Risk Mitigation
  2. Bet on Industrial Strength in the Global Economy
  3. Bet on Diminishing Supply
  4. Bet on Investment Demand

Risk Mitigation

One of the best reasons for investing in silver is that it might provide protection during economic crises.

Central banks generally react to crises by lowering interest rates and increasing the money supply. These actions have the potential to weaken currencies and erode confidence in stock and bond markets.

Unlike financial assets, physical assets such as silver can’t be created on paper. There is a limited above ground supply of silver. For this reason, it is far more likely than financial assets to hold its value during periods of turmoil

Bet on Industrial Strength in the Global Economy

Silver is vital to many industries, so strength in the global economy should translate to higher prices.

In particular, silver demand for jewelry is strong in India. As these and other emerging market countries continue to grow, their demand for silver could increase sharply.

Bet on Diminishing Supply

The supply picture for silver might be one of the most attractive reasons for investing in the commodity.

Depressed prices for silver combined with high mining costs have caused production numbers to fall in recent years. Unless prices pick up substantially, many mining projects will remain on hold.

At the same time, silver scrap supply remains at multi-year lows. The combination of low scrap supply and low mine production could be a recipe for higher prices.

Bet on Investment Demand

While industrial demand for silver remains fairly consistent, investment demand can be much more variable.

Increases in investment demand can result in significant increases in silver prices, particularly when supply remains constrained.

One reason investment demand might pick up is the gold-silver ratiowhich is approaching its highest level in 10 years. In other words, gold is historically expensive relative to silver. 

Investors may want to buy silver as a bet that this ratio will head lower.

Should I Invest in Silver?

All investments have potential risks and rewards, so traders should take all information into account before investing.

However, investing in silver, particularly as part of a broad asset diversification plan, could be beneficial for several reasons:

  1. Investors should consider silver for its potential to mitigate portfolio risk:
    • Silver could perform better than stocks and bonds when there is global political unrest.
    • Silver could perform better than financial assets during periods of hyperinflation.
    • Silver may even perform better during periods of severe deflation, particularly if central banks respond by dramatically devaluing their currencies.
  2. Buying silver is a way to bet on strength in emerging countries, many of which have experienced prolonged political instability. As a result, people in emerging economies are less likely to trust fiat currencies and more likely to want hard assets such as silver.
  3. Silver is a way to bet on growing global industrial demand for metals.

However, investing in silver could fail if certain events materialize:

  1. A strong US dollar
  2. A slowdown in China and India
  3. Substitution from silver into other metals by industries such as electronics and jewelry

What Do Experts Think About Silver

One market watcher argues that depressed silver prices, particularly relative to gold, could be the catalyst for higher prices.

Commerzbank on Silver

Commerzbank believes that low prices could bring both investment and industrial buying:

…silver has catch-up potential vs. gold. The positive economic development is likewise an argument in favor of silver because it means that industrial demand is likely to become even more dynamic – which accounts for more than half of total silver demand. Given that it is entirely conceivable that demand for bars and coins will be stronger, as well as demand from ETF [exchange-traded-fund] traders, demand growth is likely to be even more pronounced.

Commerzbank Research Report

Another silver analyst agrees, but sees potential for gains in both gold and silver:

… essentially, we see a once-in-a-decade opportunity in the gold and silver market.

Taki Tsaklanos, lead analyst at Investing Haven

How Can I Invest in Silver?

Investors have several ways to invest in silver:

Silver Trading & Investing Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage CostsSecurity CostsExpiration DateManagement CostLeverageRegulated
Silver Bullion1YESYESNONONONO
Futures5NONOYESNOYESYES
Options5NONOYESNOYESYES
ETFs2YES*YESNOYESNO**YES
Mining Shares2NONONONOYESYES
CFDs3NONONONOYESYES

*Storage costs are passed on to traders in the form of management fees.

**Some metals ETFs offer exposure to 2x or 3x the movement in silver prices.

Silver Bullion

Physical silver bullion such as bars or coins is the most direct way to invest in silver. However, investing in bullion requires a secure storage facility. Ultimately, the cost of this storage and the low value-to-weight ratio could make holding physical silver an impractical proposition.

Silver Futures

The COMEX division of the Chicago Mercantile Exchange (CME) offers a contract on silver that settles into 5,000 troy ounces.

The contracts trades globally on the CME Globex electronic trading platform and have a variety of expiration months.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of silver.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing. 

Silver Options on Futures

The Intercontinental Exchange (ICE) offers an options contract on silver futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of silver futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in silver futures to profit from their trades. 

Silver ETFs

ETFs are financial instruments that trade as shares on exchanges in the same way that stocks do.

While ETFs may seem like perfect proxy for investing in silver, traders should be aware of their considerable risks and costs.

Many ETFs invest in silver futures or options. As for the ETFs that invest in silver itself, those funds incur the same storage and security costs that individuals do. Ultimately, these costs get passed on to the trader.

When stock markets decline, ETF prices sometimes decline as well. Investors could find that their silver investment is behaving like a stock investment.

Here are 4 leading silver ETFs:

4 Leading Silver ETFs

iShares Silver TrustETFS Physical Silver SharesPowerShares DB Silver FundE-TRACS UBS Bloomberg CMCI Silver ETN

Shares in Silver Mining Companies

Purchasing shares in silver mining companies theoretically allows traders to make a leveraged bet on the price of silver:

  • Many of the costs of running a mining company should be fixed.
  • As the price of silver increases, the additional revenues should flow to the bottom line as profits.
  • Markets assign a multiple to these profits, so in bull markets traders should make more money from owning shares.

However, silver prices rarely rise in a vacuum.

When the price of silver rises, mining costs generally rise as well. In fact, mining shares have rarely outperformed silver prices during bull markets.

CompanyCurrent PriceDescriptionExchange
Wheaton Precious Metals Corp.
Canadian silver and gold mining and streaming company.New York (NYSE)
Pan American Silver Corp.
Pan American Silver Corp. Logo
Canadian company engaged in exploration, extraction, processing and refining of silver from mines.New York (NYSE)
SSR Mining
SSR Mining Logo
Canadian company that acquires, explores, develops and operates precious metals properties in the AmericasNew York (NYSE)

CFDs

One way to invest in silver is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of silver. The value of a CFD is the difference between the price of silver at the time of purchase and its current price.

Silver CFD trading at Plus500

Many regulated brokers worldwide offer CFDs on silver. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to silver prices without having to purchase shares, ETFs, futures or options.

How to find Silver on Plus500

How to find Silver on Plus500

Start Trading Silver

Plus500 logo

One of the leading brokers for trading precious metals, like silver, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade silver and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

Further Reading

 

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.
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