Silver

A precious-industrial metal

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Silver is a metal with a dual role -- it is both an industrial and a precious metal. This duality causes silver's price to react differently than gold at times to macroeconomic events. If gold is a currency, then silver is its change. I will never forget the memories of my grandfather; he always referred to the coins in his pocket as silver rather than change.

Silver ornaments, utensils, and coins have documented the metal's uses throughout history.

Electrum, a naturally occurring alloy of gold and silver was a currency unit used by seventh-century merchants from Lydia. Lydian coins contained 23% silver. While the Lydian's were the first people to use coins as currency, the Romans also used silver as currency. When Spanish explorers discovered huge silver deposits in Peru and Bolivia in the mid-sixteenth century, Spain became the richest country in the world. In 1792, the U.S. Congress based the new country's currency on silver and its relationship to gold. The Presidential election of 1896 pitted William McKinley against William Jennings Bryant. One of the major issues of the campaign was that McKinley supported a gold standard while Bryant advocated for a silver standard to back the U.S. currency.

Physically, silver has many of the same qualities that gold has. Both have luster and shine. Silver tarnishes but the shine returns when polished.

Today, wiring, electronics, batteries, bearings, catalysts, solder require silver. Silver nitrate was required for the production of photographic paper. The advent of digital photography decreased demand for silver but new technologies such as solar panels, cell phones, and computers as well as other applications in other sectors have increased industrial silver demand.

Most silver today comes not from primary but secondary production; it is a byproduct of other metals. The ores of copper, lead, and zinc contain silver. The largest producer in the world is Mexico followed by China, Peru, Australia, Russia, Poland, Bolivia, Chile, the United States and Argentina. While there is industrial demand for silver, it is investment demand that really drives the price of the metal.

Silver's price tends to be far more volatile than gold- it is a more speculative commodity. Perhaps this is because governments around the world hold gold as a foreign exchange asset but they do not hold silver. Currently, annual historical volatility of gold is around the 17% level while silver's annual historical volatility is just over 37%. Gold trades more like a currency and silver trades like a commodity and only occasionally takes on a financial role. The price of silver tends to be most volatile when investors and speculators become involved in the market. Individuals hold the biggest cumulative stockpiles of silver in the world. There is silver in many, if not most, households in the form of jewelry, silverware, trays, coins and other items that contain the precious metal.

Silver has seen amazing price spikes over past decades. In 1979 when the Hunt brothers attempted to corner the market in silver, the price rose to $50 per ounce. When the price of silver collapsed, the Hunts lost their shirts. From 1983 until 2006 silver spent most of the time trading below $10. Between 2004 and 2011, the price rose from under $6 to $49.82 per ounce. Today silver trades at around $16 per ounce.

There is a long history of speculative activity in silver. Fortunes have come and gone in the silver market. Horace Tabor, a U.S. senator and legendary silver prospector, made a fortune in the metal because of the Sherman Silver Purchase Act in 1890. The Act enforced an increase in the monthly governmental purchase of silver. The repeal of the legislation in 1893 resulted in Tabor's financial demise.

The most liquid market for silver is the London physical silver market. The unit of trade in London is a 1,000-ounce bar. Silver futures and options contracts trade on the COMEX division of the Chicago Mercantile Exchange (CME). Each futures contract represents 5,000 ounces of the metal. ETF and ETN products designed to take advantage of price movements in silver have added a new dimension to this market. These products make an investment in silver readily available for many investors.

As a precious metal with a glorious history, silver has always captured the imagination of speculators and investors. Perhaps that is due to the wild price volatility in the metal at times. For many, volatility equals opportunity.

Update on Silver

Silver has been in a bear market since 2011 when the price peaked at almost $50 per ounce. Silver, along with other metals and commodity prices in general, has moved progressively lower over the past four years. On December 3, silver traded at $13.77, the lowest level since August 2009.

The bull market in the U.S. dollar, economic weakness in China and the downtrend in raw material prices have all contributed to weakness in the price of silver. Key support is now at $11.725, the April 2009 lows and then at $8.40 the lows seen in October 2008. Other commodities continue to make new lows. On December 7, the price of oil fell to $37.50 on the active month NYMEX crude oil contract, the lowest level since March 2009.

One of the things that weigh on the price of silver is the prospect of an interest rate hike from the U.S. Federal Reserve in December 2015. Higher interest rates would both increase the cost of carrying long positions and are likely to provide support for the U.S. dollar. A strong dollar tends to be bearish for commodity prices as the currency is the pricing mechanism around the world.

While supply and demand fundamentals are important for the price of silver, it is investment demand that drives price. In 2015, investors have shunned commodity investments given the bear market and as we prepare to enter 2016, the trend remains lower. Silver has been making lower highs and lower lows since 2011, for now, it seems the path of least resistance still appears to be lower although brief relief rallies are possible.