How to Trade Silver Successfully (Plus Strategy Tips)

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Silver is one of the four precious metals you can trade in the financial market. The other three are gold, palladium, and platinum.

This metal 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. Again, they are all found deep inside the earth’s crust, which makes them expensive to mine.

But, the difference comes in pricing. While an ounce of gold sells for more than $1,500 or more, an ounce of silver sells for $21.

Silver vs gold

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.

One of the most common indicators of the valuation of silver is the gold-to-silver ratio which reflects the amount of silver that can buy one ounce of gold. Historically, the ratio has averaged about 15 to 1 in the long term and 40 to 1 in the near-term.

gold/silver ratio since 2002
Gold-to-silver ratio since 2002

The historic defeat of silver

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, so 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.

What moves silver prices?

As mentioned, silver is both a precious metal and an industrial one. As a precious metal, silver tends to be affected by the overall monetary policy of the United States. In this, the metal reacts to the periodic data like on employment, inflation, GDP, and retail sales.

These numbers always point to the actions by the Federal Reserve. In theory, strong numbers tend to mean that the Fed will tighten monetary policy, which will push the US dollar higher. Silver tends to have a small inverse relationship with the US dollar.

However, at times, the performance of inflation can attract more people to silver. For example, when inflation rises, it means that people will move to silver since it is also seen as a hedge against inflation.

There are other things that move silver. For example, strong manufacturing and industrial data means that the demand for silver will be rising. This could be a positive sign.

In addition, supply and demand dynamics can affect prices. For example, silver prices jumped during the Covid pandemic as more mining companies reduced supplies.

How to trade silver

Types of silver assets

Before we look at how you can trade silver, let us look at the various ways in which you can do it.

  • Physical metal – This is where you buy and sell physical silver. This is not an ideal method for most people.
  • CFDs – A CFD is an asset that tracks the price of a real asset. These products are offered by most online brokerages.
  • ETFs – There are several ETFs that track silver directly while others track silver mining companies.
  • Futures – You can trade silver futures and options if your broker provides them.

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.

Technical analysis

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.

Some of the technical indicators you can use to trade silver are moving averages, Relative Strength Index, and the MACD.

Demand and supply

To become a good silver trader, it is also important for you to understand the demand and supply dynamics. Most of the world’s silver is mined in countries like Mexico, China, Peru, and Australia. The biggest mining companies are Fresnillo, Glencore, Goldcorp, and Pan American Silver Corp. On the other hand, the biggest demand for the metal is in companies like China, Japan, India, United Kingdom, US, Canada, and Germany among others.

As the middle class has risen around the world, the amount of silver demand and supply has risen (from 20K metric tons in 2005 to a high of 27K in 2018). The demand too has continued to rise, fueled by the fabrication industry, the jewelry industry, and the photovoltaic industry. However, the price will depend on the Fed’s monetary policy outlook.

Summary: How difficult is it to trade silver?

Let us to be clear, We do not recommend any new trader to focus on silver. For experienced traders, We 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.

External Useful Resources

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