How to trade silver?
Tips to get you started with silver trading
Silver trading – The basics
Unlike gold, silver is not traded just as a financial asset. This precious metal has extensive industrial use. However, most investors turn to silver trading for the potential to profit from the price fluctuations. Silver is often called the poor man’s gold. Let’s take a closer look at the unique characteristics of this fascinating market.
Who trades silver and why?
Traders and investors buy silver for three basic reasons:
It is not long ago that silver has become a highly sought-after commodity in the trading markets. Previously, traders mainly focused on gold. However, the rising prices of gold have convinced many to spread their risk over other investment options in terms of precious metals.
It is true that the market for silver is highly volatile compared to gold, but this metal offers an equally impressive hedge against inflation and market fluctuations as gold. The plus point is that it does so at a lower price compared to gold.
Another reason why silver is popular is because 50% of the demand for silver is constituted of industrial demand. This means that even if the investment market takes a blow, silver can always be sold to industries.
What affects the price of silver
Here are the three key factors that determine the price of silver.
Demand and supply of silver - Just like every other commodity, the basic price of silver is determined by the changes in demand and supply. Demand includes the industrial demand for the metal too.
Technology - The industrial application of silver includes green technology and solar photovoltaic systems, which happens to be in great demand nowadays. The demand for silver is directly proportionate to the demand for its industrial applications and hence, its price is affected accordingly.
US Dollar value - Since silver is quoted in US Dollars, its price is inversely related to the dollar value. A strong dollar pushes the price of silver lower, which is often seen as a good opportunity for bullish traders to buy in.
Historical prices of silver
Looking at the fluctuations of the silver price in the past five decades, it is hard not to notice the extreme rise towards the end of 1979, also known as the Silver Peak. In the 1970s, the price of silver jumped from under $1.5 per ounce to nearly $32 per ounce. By the end of 1980, the price fell to almost what it was only 12 months before.
The silver peak was the result of billionaire Hunt brothers’ attempt to corner the market. It was speculated that the brothers were holding one third of the entire silver supply, excluding the amount of silver held by governments. Such events are hard to play out again, as there are more big players in the market.
The Silver Peak
Price correlation between silver and gold
Despite silver’s fundamentals being different from those of gold, there is a strong correlation between the price of gold and silver as the two precious metals are traded by the same investors. What gave gold a clear leadership over silver was the 2008 financial crisis. Silver prices followed suit soon with much greater volatility. As long as the two metals continue to be traded predominantly for their monetary value, the correlation is expected to remain intact.
Example of silver trading
Let’s suppose that your technical analysis on the daily chart of silver indicates a high probability for the price of silver to fall. You sell 1 lot (5,000 oz) of XAG/USD at the price of $16.38. This position size equals $50 profit or loss for every 1 cent movement in the price of silver.
Later that day silver is trading at $16.25 and you decide to close your position. The profit made on the trade is calculated as follows: change of price in cents x $50 = 13 x $50 = $650.
Gold and silver may be the most traded precious metals in the metals market, but they are not the only ones. With more and more traders turning towards precious metals, platinum is starting to get the attention of traders as an alternative asset to trade.
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Losses can exceed deposits.