Silver is one of the most popular metals traded by most traders. According to the London Bullion Markets Association (LBMA), more than $5.2 billion worth of silver is traded in London every day. Globally, the figure is worth close to $10 billion. In this report, we will look at the best approaches to trade silver today.
What is silver?
For starters, silver is a greyish commodity, often classified as a precious metal. The metal is found in large quantities in countries like Mexico, Peru, and China. Most of the mined silver is sold to companies that manufacture household items like mirrors, cutlery, and jewellery. A small amount of mined silver is bought by investors and central banks because of its store of value.
Some of the biggest silver mining companies in the world are Fresnillo, Hecla Mining, Polymetal, and Pan-American Silver Company, among others. According to the United States Geological Survey, more than 980 metric tons of silver is mined every year.
What moves silver prices?
To understand how to trade silver, you need to have a good understanding of the factors that move silver prices. Having a good understanding of these factors will help you understand the current price and anticipate future price movements.
Monetary policy like interest rates and quantitative easing have a direct implication to the price of silver. In most cases, the price tends to rise when the Federal Reserve turns dovish and fall when it is extremely bullish. There are two main reasons for this.
First, when the Fed turns dovish, investors tend to rush to the metal because of its inflation hedge characteristics. Second, a dovish Fed tends to devalue the US dollar. Like all dollar-dominated commodities, there tends to be an inverse relationship with the greenback. The chart below shows how silver prices rose as the dollar weakened when the Fed slashed interest rates in response to the Covid-pandemic.
USD vs silver price
Unlike gold, silver is an industrial metal, meaning that it reacts to demand and supply dynamics. Its price tends to decline when the global economic is weakening and vice versa. The reason for this is that, in a strong economy, people tend to increase their purchases of silver.
Similarly, in a recession, the demand tends to crater. Indeed, the price reached a multi-year low of $11 at the height of the pandemic before receiving a boost from the Fed.
Government policies, especially in China, Europe, and the US, tend to have an impact on silver prices. For example, recent decisions by several governments to invest in clean energy have been seen as being positive for silver price because of the vast amount of it used in the manufacture of solar panels.
Other major movers of silver prices are technical factors, supply disruptions, and the overall performance of gold. In most cases, when gold price is rising, small traders tend to push silver prices higher. For one, with a $1,000, you can make more money trading silver than gold.
Top silver assets to trade
There are several silver assets you can use to trade the metal. These are:
- Silver contracts-for-difference (CFD) – A CFD is a financial asset whose price mirrors that of the real asset. CFDs are the most popular ways of buying and selling silver.
- Silver ETFs – An Exchange Traded Fund (ETF) is a fund that tracks the price of silver or the share prices of silver miners. These assets are offered by most brokers. Some of the leading silver ETFs to trade are the iShares Silver Trust and ProShares Ultra Silver.
- Silver stocks – This is an indirect way of trading silver, where you trade shares of companies that mine the metal. The idea is that their share price will climb when the overall price of the metal climbs. Among the biggest silver stocks to trade are Fresnillo and Polymetal.
- Silver futures – These are relatively complex that involve predicting the price of silver in the future. They are offered by several brokers like Interactive Brokers and Charles Schwab.
- Silver options – Options are assets that traders use to predict the future. If you believe that the price will rise, you buy a call option, which gives you a right to buy the metal at a later date. If you believe the price will fall, you buy a put option.
Silver price vs iShares Silver Trust (SLV)
How to trade silver
The first step to trade is to find a broker, who will act as the intermediary between you and the market. Ideally, if you are a new trader, you should consider a broker with a long track record, one that is regulated by a leading regulator, and one who has lower costs.
On pricing, you will find out that most brokers don’t charge you a commission. Instead, they make money through spread, which is the difference between the bid and ask prices.
The next step is to determine the asset you want to trade. It could be silver CFDs, silver ETFs, or stocks among others.
Next, you need to come up with a trading strategy. If you are a new trader, we recommend that you spend time reading about how the market works. Also, you should use the demo account to create and backtest the strategy. Some of the key details you need to learn are:
- Fundamental analysis – This is the concept of using news and data to determine the future price of an asset. In this, you need to learn about interest rates and the key events in the economic calendar like nonfarm payrolls and manufacturing PMIs.
- Technical analysis – This is the idea of using mathematical tools to analyse the current silver price and predict the future. Among the most popular technical tools are moving average, relative strength index, and the MACD.
- Price action – This is the strategy of looking at chart patterns and predicting how an asset’s price will move. Among the most popular patterns to look at are triangles, cup and handle, and pennants.
You also need to come up with quality silver-trading strategies.
Some of these strategies are:
- Scalping – This is where you open and close a trade within minutes. The goal is to make small profits several times a day.
- Day trading – The process of opening and closing trades within a day. The goal is to ensure that you don’t leave trades open overnight.
- Swing trading – This is an approach where you open a trade and leave it open for several days.
- Arbitrage – This is a strategy where you open two trades at the same time and profit from the loss-profit spread.
Silver is an excellent asset to trade. Its price is significantly lower than that of gold making it more volatile. It is also easy to trade it because of the vast amount of news and events that move it. Still, you need to be cautious about the metal if you are a beginner. Take time to come up with a strategy and test it over a long period of time.