Silver prices: The top 10 most important drivers

1) US Dollar

Like most internationally traded commodities silver is priced in US dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.

As with gold but to a lesser extent, the value of silver, a fiat commodity currency, will also be largely determined by its attractiveness relative to other fiat currencies – the fiat paper currencies issued by central banks.

A weaker dollar can also act as a disincentive to producers to increase output. For example, a depreciation of the US dollar against the Mexican peso can reduce profit margins for a silver miner in Mexico. All of the miner’s revenues will be received in US dollars, which will now buy less pesos, but some proportion of the costs will be denominated in pesos and will remain constant (at least in the short term). Therefore, the prospect of a lower profit margin acts as an incentive to decrease the supply of silver (and indirectly for those mines where silver is mined as a byproduct).

Silver prices have a relatively high inverse correlation against the dollar of around -0.53.

2) US monetary policy

Higher interest rates, reflected in higher bond yields reduce the attractiveness of holding non-interest bearing assets like silver and gold.

3) Production of other metals

Geographically, nearly half of mined silver comes from the Americas. Indeed six of the ten largest producing countries are in this region, including the two biggest, Mexico and Peru.

Most silver emerges as a by-product of the mining of other metals, particularly from lead/zinc operations. Only around 30% of output comes from so-called primary silver mines, where silver is the main source of revenue. This is noteworthy given that the impact of the price of silver is most acute on primary silver production, whereas by-product silver production is in large part a function of the price of the other metals, with which silver is mined.

4) Mining costs

Yields are falling, year by year, which puts upward pressure on mining costs; the average silver yield of the top six silver mines has declined 38% since 2005. The global average cash production cost, expressed in U.S. dollar terms, for primary mines was estimated at $7.74/oz in 2014 in large part thanks to producers’ currencies depreciating against the dollar.

However, this doesn’t cover the complete cost of producing silver. Part of the problem in defining the viability of silver mining is that there isn’t a unilateral metric to report the actual cost of silver production, a problem gold miners face, too since the majority of the metal is mined as a byproduct with other metals.

5) Investment demand

Unlike other industrial metals there is significant demand for silver as an investment product. In 2014 the Silver Institute estimated that around 18% of demand for new silver came from the physical coin and bar sector as investors increased holdings.

As a precious metal, silver tends to track the price of gold, it being viewed as a safe haven. However, given silvers extensive industrial uses it tends to be viewed as a ‘beta’ version of gold, exhibiting much higher levels of volatility than gold.

6) Industrial demand

Industrial demand accounts for over 55% of silver demand. Silver is the best electrical and thermal conductor of all metals and so is used in many electrical applications, particularly in conductors, switches, contacts
and fuses. The most significant uses of silver in electronics are in the preparation of thick-film pastes, in multi-layer ceramic capacitors, in the manufacture of membrane switches, silvered film in electrically heated automobile windshields and in conductive adhesives. Silver used in the fabrication of photovoltaic cells is seen as an area of rapid growth in the short to medium term. Other industrial uses for silver include as a coating material for compact disks and digital video disks, mirrors, glass coatings and cellophane and batteries.

One area of sharply declining silver demand is photographic film. After peaking around 2000, demand for silver from this application declined by 78% in the period to 2014. Photographic film is used in radiography, the graphic arts and in consumer photography. Photographic film manufacturers demand very high purity silver.

7) Jewelry and silverware demand

Silver possesses working qualities similar to gold, enjoys greater reflectivity and can achieve the most brilliant polish of any metal. Pure silver does not tarnish easily but to make it durable for jewelry, it is often alloyed with small quantities of copper. It is also widely used with base metals in gold alloys.

8) Above ground tonnages

The final element that differentiates silver from purely industrial metals is that the metal is commonly recycled or held as an above-ground asset by private and institutional investors as well as by industry. Indeed, old jewelry scrap, coins and bars make up a significant part of the scrap pool (and they are arguably the only really price-sensitive elements in this market). Lower prices tend to result in lower levels of scrap entering the market with processors sometimes holding back material in the hope of higher prices.

9) Energy costs

A drop in gasoline prices could increase consumer spending for silver jewelry, boosting physical demand; however, on the other hand investment demand for silver could suffer as lower oil prices will lead to weak inflation. In addition, weaker oil prices might lead to lower physical silver demand in the Middle East.

Mining operations will see the biggest impact of weaker oil prices as metal production is by its very nature an energy-intensive process. In the simplest terms, cheaper energy inputs means lower production costs throughout individual cost curves.

10) China

As well as being a key component of China’s industrial demand, silver is also used as collateral by cash strapped companies unable to secure credit using traditional banking channels. Silver has also reportedly been stockpiled by the Chinese authorities looking to establish a reserve to secure the future of China’s solar power industry.

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