How to Trade Silver Successfully – Introduction
Silver is often called the poor man’s gold. Reason for this is simple. They are both precious metals which are mined from deep areas of the earth’s crust. They are also used in the manufacture of jewelry and other precious coins. But, the difference comes in pricing. While an ounce of gold sells for more than $1,300, an ounce of silver sells for $17.
The difference for this is simple. While silver is an industrial metal, gold is like insurance. People and governments buy it as a store of value. They imagine that they will be safe owning gold if the world comes to an end. As a result, gold tends to have a negative correlation with the dollar. When the dollar gains, gold tends to fall as well. Only a tiny percentage of physical gold goes to the manufacture of jewelry, medals, and ornaments.
On the other hand, silver is an industrial metal with a lot of uses. It is used in the manufacture of utensils, silverware, coins, and even in the vehicle industry. Only a small percentage of people buy silver for its store of value characteristics.
An interesting story is told about a rich man in Texas called William Hunt. In the 70s, he was among the richest people on earth. He owned large pieces of land with huge oil deposits.
After his death, he left his estate to his two sons. After studying the surge in the gold market, the brothers decided to invest in silver. They believed that silver would one day reach the price of gold. They spent their entire capital buying physical silver and silver futures. They also borrowed heavily to finance their silver shopping.
On their own, they managed to get the price of silver to more than $50. Then, in late 70s, the commodities and futures commission (CFTC) announced that no individual would be allowed to own more than 3 million ounces of silver. This led to a collapse the price of silver. Financiers came calling and the two brothers filed for bankruptcy.
Anyone who has tried to trade silver knows how difficult it is. While silver and gold are related, their movements are not influenced in the same way. In fact, they are almost negatively correlated. This is because, a strong economy tends to require more silver. On the other hand, a strong economy tends to be disadvantageous to gold.
Therefore, to trade silver successfully, you first need to understand this foundation. Then, you need to understand clearly how to perform technical analysis. As you will realize, silver tends to have major movements within a short period and then stall. In fact, in the past one year, the price has been on a very narrow range.
Let me be clear, I do not recommend any new trader to focus on silver. For experienced traders, I recommend that you take time to come up with a good trading strategy. This strategy should be different from what you normally use to trade currencies and stocks. Make sure you understand the different supply chains and the demand.