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What Causes Volatility in the Silver Market?

The precious metal market is notorious for its volatility caused by various factors including but not limited to inflation, the price of the dollar, changing demand, and so on. Silver as an investment precious metal is known for its unique attributes and is relatively short in supply. It maintains relevance both as a form of currency and a store of value. 96% of its global supply is sourced from 20 countries alone, Mexico is the largest producer. Though, interestingly enough, even though the demand for silver is comparably constant, we see changes in its price rather often. So what causes the silver market to be so volatile?

First and foremost, we need to consider the supply and demand of silver that essentially makes it a precious metal. Because it is a scarce metal, the supply is limited but the demand for silver is constant or increasing. Consequently, any changes to either demand or supply, such as complications in mining or increased demand due to new technology like solar panels, cause the price of silver to spike. This can have both short-term and long-term implications.

It is important to note that about 60% of silver goes into industrial use. A wide range of products require this precious metal and with the increasing development of technology, the demand in this sector is only expected to rise. The most prominent use is in the manufacturing of batteries, dentistry tools and medicine, (increasingly) solar energy, superconductors and microcircuits.

When it comes to analysis in the stock market though, silver prices are also driven by gold prices. Its price tends to follow the course of the gold price. This is referred to as the gold-silver ratio. When speculators are interested in precious metals, the price for silver rises with investment demand. However, the prices also fall just as easily when the demand in silver falls.

Another important factor that seems more relevant now than ever is economic trends. During times of economic difficulties when people are sceptical of financial systems, investment in precious metals naturally increases. This has certainly been a fluctuating factor through the COVID-19 pandemic. 

We are also all aware of the fact that changes in the U.S. Dollar's position as the leading currency have extremely wide-ranging effects globally. It shares an indirect relationship with silver whereby an increase in the strength of the Dollar usually undermines the price and perceived value of silver. However, at the same time, many investors look for these opportunities to buy silver and what is seen to be a discounted price.

Lastly, government regulations and actions, even though mostly focused on gold, are still in play with silver. Globally, central banks trade silver bullion. A large amount of silver is also consumed by national mints including the U.S Mint.