How is the price of silver fixed?
Silver, often regarded as gold’s little brother, occupies a unique place on the financial markets. Unlike gold, whose prices are mainly set by the London Bullion Market Association, the price of silver metal is influenced by a complex combination of often interdependent factors, ranging from its use as an industrial raw material to its role as a safe-haven investment.
Factors influencing the price of silver
Given the metal’s importance in a large number of industries, the price of silver is primarily influenced by supply and demand. But as silver is also an asset used to hedge assets, its price is also sensitive to economic and financial turbulence, as well as to political and geostrategic uncertainties…
Supply and demand
- Silver mine production
Mining production is obviously a key factor in market supply. Production is influenced by many factors, such as extraction costs, the availability of deposits and the level of investment allocated to the mining industry. All of these factors can affect production levels from one year to the next. - Recycling supply
Silver can be recovered from a variety of sources, including the recycling of electronic scrap, industrial equipment and jewellery. The supply of recycling depends on the availability of materials to be recycled and the economic conditions that encourage this practice. It should be noted, however, that the supply of technological products has accelerated considerably in recent years, giving rise to a feeling of faster obsolescence and encouraging users to renew their appliances more and more frequently. Recycling equipment at the end of its commercial life therefore accounts for a growing proportion of the silver available. - Industrial demand
Conversely, silver plays a crucial role in many fast-growing, cutting-edge industrial sectors, including electronics, automobiles and consumer appliances, as well as renewable energies and biotechnologies. This industrial demand, linked to economic cycles, technological innovations and environmental policies, therefore influences demand for silver and thus impacts its price. - Investment demand
Silver is also sought by investors as a safe haven and a means of portfolio diversification. Investment demand can be influenced by the economic outlook, interest rates, inflation, geopolitical tensions and investor confidence. - Jewellery demand
Although it is no longer the main use for silver metal, the jewellery industry continues to appreciate its beauty and brilliance, which can respond to changes in fashion, consumer tastes and buyers’ income levels.
Economic and financial factors
- Monetary policies and interest rates
Central bank decisions on monetary policy and interest rates can have a significant impact on the price of silver. Economic boosting policies, quantitative easing measures or interest rate rises can influence investor confidence and alter asset allocation preferences. - Economic outlook
The global economic outlook plays a major role in the demand for silver. Robust economic growth and positive indicators can encourage investors to seek riskier assets, which can reduce demand for silver as a safe haven. Conversely, signs of economic slowdown or uncertainty can stimulate demand for silver as a hedge against risk. - Geopolitical tensions
Geopolitical tensions, such as international conflicts or political crises, can affect demand for silver metal as a safe-haven asset. When investors fear geopolitical turbulence, they may turn to silver as a means of preserving the value of their investments. Geopolitical events can therefore have an impact on demand for silver and thus influence its price. - Speculation on the financial markets
Investors and speculators can take positions in silver futures contracts, betting on price fluctuations. Speculative movements can create temporary volatility in the silver price, depending on the expectations of market participants and speculative capital flows. - Currency fluctuations
Fluctuations in exchange rates between major currencies can also affect the price of silver. As an asset traded in different currencies, exchange rate fluctuations can make silver more or less attractive to investors, who may buy the metal in one currency with the aim of selling it in another, making a capital gain in the process.
Mechanisms for setting the silver price
The price of silver metal is determined by the interaction of the spot and futures markets, as well as by other external factors influenced by various government or monetary policies.
The spot market
- The major silver ‘spot markets’
The price of silver is influenced by transactions on the spot markets, where buyers and sellers enter into contracts for immediate delivery of silver. The main spot markets for it include the London Bullion Market (LBMA), the Commodity Exchange (COMEX) and the Shanghai Gold Exchange (SGE). - Role of traders and market participants
Precious metals dealers play a central role in the spot silver markets. They facilitate transactions between buyers and sellers, bringing liquidity and efficiency to the market. Market participants, such as banks, investment funds and financial institutions, also interact on the spot market and influence the price of silver metal.
The futures markets
Futures markets offer the opportunity to trade silver contracts for future delivery at a pre-agreed price. These contracts are traded on commodity exchanges such as COMEX and allow participants to anticipate silver price fluctuations and protect themselves against market risks.
Nevertheless, these speculative positions taken on futures contracts will also influence the price of silver dynamically and permanently, depending on investors’ more or less confident forecasts. Speculators (hedge funds or traders) can take long positions (betting that prices will rise) or short positions (betting that prices will fall), which can create volatility and temporarily affect the price of silver. Not to mention the fact that the leverage used in futures transactions can amplify price movements, which partly explains why silver prices are more ‘brutal’ than gold prices.
The external factors
Several organisations and associations play a role in setting silver prices. Among the most important are the London Bullion Market Association (LBMA), which sets the rules and standards for the silver market in London, and the CME Group, which runs the COMEX and sets the specifications for silver futures contracts.
Government regulations and policies relating to precious metals can also influence the price of silver. Whether it be monetary policies, import/export taxes, sales restrictions or strategic reserves, decisions taken by the authorities can have a direct or indirect impact on the supply, demand and price of silver.