The Silver Market

While silver has played a prominent role in the economy for millennia, and still plays a noteworthy one today, the physical silver market itself isn’t all that large compared to some other commodity markets, and certainly pales in comparison to its fellow precious metal gold, at least as far as the physical metals are concerned.

Total investment in physical gold these days runs at over $40 billion a year, compared to only about $4 billion a year in physical silver. While we mine almost a billion ounces of silver a year these days, most of this is used for purposes other than investment, leaving only about 20% of the silver produced to be used for stores of wealth.

The Silver Market$4 billion a year certainly is not a lot, especially compared to how much money gets invested in other types of investments. If it were just for this, the silver market may hardly merit mentioning, as this total is a paltry sum compared to all of the world’s investment in a given year, a very small percentage of that indeed.

If this were many years ago, when trading in precious metals were limited to just trading the physical assets, before the creation of organized financial markets to facilitate trading in these assets, then this small amount of production would not amount to that much for practical purposes.

Even back then though, assets were traded among those who possessed them, although the amount of trading you could do was pretty limited, and therefore the market for something like silver, or even gold, was limited to a considerable degree by the amount of the commodity that entered the marketplace over a given period of time..

However, that’s not how it works these days, and the trading of an asset itself can produce much higher notional value numbers than how much of the physical asset enters the market. In other words, the value of the amount of an asset like silver, or gold, or other commodities that are both durable and used for investment, can be much higher than the amount produced, and this is exactly what happens today in these markets.

This happens because nowadays we can simply trade something on paper, without the actual asset ever changing hands, for instance with what usually happens in the silver futures market, with both buyers and sellers engaging in contracts to deliver and take delivery of silver that neither intend to actually execute.

While this trading is based upon pure speculation, bets on movements of price essentially, it is meaningful to the market because it adds greatly to the level of volume and therefore liquidity that the market would be left with if not for the paper trading.

The Notional Value of the Silver Market is Not So Tiny

Most of the silver that enters the market in a given year is new silver, with a much smaller percentage entering it from recycling. Normally, with a commodity, supply will influence the price of it greatly, and this is certainly true of other commodities besides precious metals, as they are used exclusively as business inputs.

While silver is used as a business input as well, and most silver produced is used that way, precious metals like silver are also traded as investments, to be held for various time periods in order to seek capital accumulation. While people may speculate on other commodities during the period from their production to their use, precious metals are different in that they are also held longer term to look to realize longer term changes in their value.

With silver, although supply and demand from the non-investment side does influence prices, much, much more silver is bought and sold from the investment side, as is the case with gold as well.

In the gold market, in spite of only $42 billion a year of physical gold being bought by investors, almost $10 trillion worth of gold trades are executed in the market per year nowadays, which is a huge amount and is the reason why the gold market is so large.

This adds both a huge amount of liquidity as well as much greater volatility to the market, as you may imagine with so much more gold changing hands per year than is physically exchanged. This is understood as a measure of leverage and with leverage this high, this can influence markets very substantially, as is indeed the case with gold.

The silver market is even more leveraged, with the total value of the paper trading in silver amounting to $2.27 trillion worth a year currently. When the size of the market gets measured in trillions, now we have a significant market size indeed.

This figure does not even account for the over the counter trading in silver, and while figures aren’t kept for these trades, we know that a lot of silver changes hands in this market as well. What we do know is that the silver market, the trading market for it, is a very large one by any measure.

This High Turnover Offers Significant Potential Opportunity

Aside from looking to buy physical silver and hold it, which some investors do, over the long term, having so much of it traded, with the paper market being about 500 times greater than the physical market for silver, this leads to a lot of potential volatility.

This is why the gold market is so volatile, being leveraged about 300:1, so we may expect that the silver market, leveraged about 500:1, should be even more volatile, and this is indeed the case.

Such volatility may not sit that well with long term silver investors, who prefer lower volatility and more steady price accumulation, but for those who seek shorter term returns, the added volatility of silver can be seen as a real benefit.

If we compare the price of silver, adjusted for inflation, from 100 years ago to today, we will see that the price has not moved at all. Back in 1917, silver traded for about $16 an ounce, and in 2017, it also trades for around $16 an ounce.

It has been on quite a journey though over these 100 years, where the price of silver has been less than half of that as well as being worth several times more at various points in time. So, while the price has been stable over this period, this does not mean that this has been the case in the interim, and far from it in fact.

One still may seek out capital appreciation with long term silver investments, because these periods may only be 20 or 30 years and it may be reasonable to expect a decent gain percentage wise depending on market conditions.

It all depends on the market, and the silver market, mostly due to its higher volatility, is not as easily predicted as other markets, due to its being particularly subject to fluctuations in demand due to investor and trader sentiment, more so than even gold is.

There are many reasons for this, but one of the big ones is that central banks do not trade in silver like they do gold, which can not only move the price of gold but do so in a more orderly fashion. With the silver market, since it is left more up to investors, completely up to them in fact, it tends to be more volatile and less stable.

This can be either a good or bad thing depending on your objectives. It may not be ideal for someone who is looking to hedge other investments, as although silver is somewhat correlated with gold, gold prices are more inversely correlated with other investments, and therefore tend to function better as a precious metal hedge.

Should one seek to take advantage of silver’s higher volatility though, and seek to trade it according to momentum and other influencers of its price, it can present more opportunities for this.

Deciding to Partake in the Silver Market

There are two main criteria for decide whether to invest in something. The first, and for most the most obvious, is the potential for return with the investment. The second, and no less important consideration, is the risk involved.

Proper risk management is key in successful investing or trading, and is the biggest edge that professionals have over amateurs. Amateurs do not properly account for risk typically in all of their trading, including their investing in the stock market as well as their investments in precious metals like gold and silver.

If one blindly invests in anything, and therefore neglects risk management, then they will leave themselves subject to whatever risk may occur. Some investors have a certain risk tolerance, where if that becomes exceeded, they will exit their trades, but risk should not be viewed purely subjectively and must be approached more systematically and sensibly than the amount of pain a trade may cause oneself.

This is particularly the case with trading in silver, and this is not something that you want to just buy and put away, like you may want to do with a certain stock or even with gold.

It’s not that it’s ever a good idea to hold any investment that way, but the higher risk involved with silver will seek to punish investors who buy blindly like this more so than most other investments will.

It always bears paying close attention to market conditions when looking to acquire any asset, and this is especially true with buying silver, or looking to take a position in the silver market, which may also include speculating that the price will decline and look to profit from that.

Trading in silver can be a very good move in certain circumstances, but it is these circumstances that determine the merit of the trade, and do so exclusively. If this is approached as either a guessing game, or worse, without even attempting to guess, then one’s fate is purely in the hands of the whims of the market.

There are various ways that one may either speculate on silver prices or look to use silver as a hedge, including buying physical silver as well as trading in various securities that either involve holding it or are connected to its price.

If one has a certain objective for these investments or trades, and if one did not the investment or trade wouldn’t make sense, then it becomes important to look to assess both the probability of the trade succeeding, the potential return side, and the implications of it not succeeding, the risk side, and look to manage both.

It is only then that we can say that we are prepared to engage in the silver market, or any other market, and while silver can present greater risk, it also can offer some very nice returns, provided that the timing, the direction, and the duration of one’s investments in it reflect the probabilities involved.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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