Like Gold, silver is a precious metal and is considered as a store of value. The price of silver is notoriously volatile, so the investors should pay close attention to silver price. What's more, understanding what factors influence silver price will help you buy or sell silver in a right time to get your gains maximized.
Similar to most commodities, the silver price is determined by speculation and supply and demand. It is also affected by market conditions (large traders or investors and short selling), industrial, commercial, and consumer demand, hedge against financial stress, and gold prices.
Large traders or investors
As we all know that the price of silver is much lower than gold price, therefore, the silver market is much smaller in value than the gold market. It is more easier to influence the silver price by a larger trader or private institutional investors. Such as Hunt brothers; in January 1980 they helped to cause a spike of the London Silver Fix to $49.45 per troy ounce, and the silver futures to reach an intraday all-time high of $50.35 per troy ounce. Also such as Warren Buffett purchased 130 million troy ounces of silver in 1997, its price was approximately $4.50 per troy ounce and total value was worth $585 million. All of these clearly indicate that the large traders or investors have the power to influence the market prices of silver.
Simply speaking, unbridled short selling can artificially depress the price of silver. Short selling is not a normal sale, which is an open or incomplete transaction. It also is the beginning of a trading. In April 2007, Commitments of Traders Reported that four or fewer traders held 90% of all short silver futures contracts totaling 245 million troy ounces, which is equivalent to 140 days of production.
Industrial, Commercial, and Consumer Demand
Compared to gold, the silver is more affected by industrial needs and by jewelry demand. The silver is commonly used in industrial, commercial and consumer, such as automobiles, superconductivity, water purification, photovoltaics, televisions, photography, computers, electronics, medical use, solar, silverware manufacturing, coins and medals and jewelry. Almost every day, new products are being introduced. Additional, the use of nano-silver particles deliver silver ions will become the newest trend.
Hedge against financial stress
Silver, like other precious metal, can be used as a hedge against deflation, inflation or devaluation. The price of silver is affected by the current market value of currency, especially US Dollar. From the relation between silver and US Dollar, it clearly shows an inverse relationship between silver prices and USD Index. When the value of US Dollar is low, the demand of silver increases (people buy silver investment products to hedge against inflation), naturally the silver price rises; otherwise, the price of silver falls.
Though it may be not very apparent to a new investor, the price of silver often tracks gold price. Thus, silver price is heavily affected by the price of gold. As the demand of gold improves, which leads to the rising of gold price, the price of silver also will increase; when gold price decreases, the silver prices will plummet by an even greater margin. Generally speaking, the silver has a tendency to follow the prices of gold.