If you’re planning on investing in precious metals, you’re probably considering gold, silver, and a range of other options. While gold is historically the most expensive precious metal, silver is much more affordable. If you’re hoping to invest in precious metals, you might be wondering: “Why is silver so cheap?”
Below, we’ve made a list of eight factors that influence the silver price. If you’re wondering why silver is always more affordable than gold, it’s a good idea to obtain a firm understanding of these considerations.
1. Historical Demand
One factor that continues to influence the price of silver is the historical demand for the precious metal. Since silver has long been a store of value for cultures worldwide, it has cemented itself as a significant player in the precious-metals industry. Societies and nation-states have used silver for millennia to create coins and other types of currency, as well as ritual and decorative items of great worth.
Silver has been used to create goods as long ago as the Greek Empire, and even before. Archaeologists have found relics from this period, as well as evidence of silver use in nearby areas.
Even in modern times, many mints still use silver to create coins and other forms of currency. Around the world, countries value silver as a primary metal when they’re issuing currency.
Its history as a currency is a factor that can affect its value and price. Still, this history is something that would have a positive impact on silver, not a negative one. As such, it does not explain why silver is so cheap.
As introductory economics dictate, supply is also a significant driver of silver prices. If demand increases but supply can’t match the need for silver, the price will increase. One of the reasons that silver is cheaper than gold is that a greater supply exists.
Experts estimate that there could be near 20 times more silver than gold in the earth, which means that silver is much easier for mining companies to access. Still, the current supply of silver is not the only factor dictating the value of silver. We must also consider scrap metal and other stores of silver.
If sudden disuse of a particular type of technology that uses silver should occur, a large amount of silver might flood the market. Supply can come from currently used silver as well as freshly mined silver.
3. Practical Use – Technological Advancement
One factor that can increase demand outside of typical bullion investment is the use of technology. Silver has a range of unique applications, which means that the precious metal is well suited to many forms of modern technology. For example, silver is an excellent conductor, which makes it a superb choice for electrical applications.
If manufacturers can’t find a cheaper material than silver, the demand for silver will increase if the technology in the sector grows.
So, what are some examples of modern technology that require the use of silver? Let’s explore some of the most common usages of silver:
Long-Life Batteries: If you’ve ever owned a watch or electronic device that requires long-life batteries, you’ve likely owned a product that contains silver.
Solar Panels: One of the most exciting technologies that now use silver is solar panels. With many Americans installing solar panels on their homes to improve their energy efficiency, plenty of silver is sitting on top of homes throughout the United States.
Soldering: Silver has become popular with construction firms for brazing and soldering metal pipes on various construction sites and industrial buildings.
Also, it’s not just technology that takes advantage of silver. If you’ve ever used a fine-dining cutlery set, you’ve probably used silver. You can find plenty of other non-tech uses for silver. Take a look around your home to see if you have any silver in your cutlery drawer or china cabinet.
4. Government Action
Government action also plays a significant role in determining the price of silver. Many governments around the world have deposits of precious metals. While the United States is famous for having large gold reserves, the nation also buys and sells silver.
Governments are not just deciding to retain bullion that can impact the price of silver – governments also use silver to mint coins. If mints choose to create new coins that contain large amounts of silver, this can affect the overall demand for silver around the world.
5. Savings Rates (Interest Rates)
You may have never thought of silver when considering interest rates. Still, interest rates have a significant impact on any type of investment – including silver. If investors can access large returns on their investments through high interest rates, they’re less likely to feel the need to invest in other asset classes.
Many smart investors realize that their money will lose its value over time if interest rates are extremely low. This is because the inflation rate can sometimes be higher than the interest rate, which means investments will lose their value faster than what they can accumulate from saving funds in a bank account with a low interest rate.
Additionally, if individuals can borrow money at low interest rates, they may be more likely to borrow cash to invest in assets. This means that low interest rates often spur investment in various asset classes.
In recent years, central banks have committed to offering extremely low interest rates to encourage investment and avoid debt crises. These low rates have led to investors moving their money away from savings accounts and into various assets, which many believe may have had a positive impact on the price of silver.
Inflation plays a critical role in the price of silver and other precious metals. Why is this the case? If you’re comparing the price of silver against the value of the U.S. dollar, inflation will see the price of silver rise against U.S. dollars. As the U.S. dollar weakens because of inflation, the cost of precious metals will increase.
While the science behind this is complicated, the basic premise is that with inflation, the U.S. dollar is weaker and can purchase less silver. Many traders use precious metals to hedge against the risk of inflation in traditional currencies.
Not only can inflation increase the price (in terms of currency) of silver and other precious metals, but it can also increase overall demand. If investors are scared that a currency is on the verge of inflating rapidly, this fear can lead to a surge of precious metal investment. Many people consider silver, gold, and other metals to be a safe haven against the risk of hyperinflation in the currency markets.
In terms of currencies and silver, it’s also essential to understand the value of the various currencies worldwide. If the U.S. dollar performs poorly in comparison to other worldwide currencies, this performance might also cause a rise in the price of gold in U.S. dollars.
7. Gold’s Value
While the gold-to-silver ratio doesn’t remain constant, it’s still an essential factor that many professional commodities traders assess when hedging their trades. Since many bullion investors tend to have money spread across multiple precious metals, you can see how prices can change in similar trends.
Many people believe that if the gold value increases, the silver value should follow suit. Still, this is not a science, and the gold-to-silver ratio fluctuates continuously.
It makes sense that if the overall demand for gold and other precious metals increases, you may see a similar move toward silver. Since silver, gold, platinum, and other metals are popular choices for investment, they can sometimes attract the same type of money.
While it’s interesting to analyze the various factors that can impact the price of silver, you will still find unknowns that can act as forces in the market. Whether a new technology that requires a sudden surge in silver supply or another precious metal that proves to be more useful, we need to understand the market’s undetermined factors.
Additionally, most financial leaders believe that silver and gold prices increase when people lose confidence in markets. While recessions are inevitable, unpredictable market factors can arise and have a sudden impact on bullion prices (as has happened with the COVID-19 pandemic).
If you’re planning on investing in silver, be sure to explore the various market trends and developments as they occur. By staying on top of the latest news and updates about the market, you can assess whether silver’s price will rise in the future.
Verdict: Consider Your Appetite for Silver
While investing in any type of precious metal carries risk, it’s always a good idea to consider diversifying your investments across multiple asset classes. If you’re interested in purchasing bullion as an investment, make sure to explore the full range of silver, gold, platinum, and palladium products on the Oxford Gold Group website. As a reliable supplier of precious metals for investors, we’re the perfect resource if you’re hoping to purchase silver as your next investment.