Understanding the Silver Market



Definition of "silver market": The buying and selling of silver at a price which is determined by the current interaction between the supply of silver and the demand for silver.

Silver Market Supply

Where does the silver bought and sold in the market come from? What are the categories of silver supply? Many analysts place sources of supply into these categories:

  • Mine Production - The silver actually extracted from mines.
  • Disinvestment - Selling into the market silver that was once privately owned as an investment.
  • Old Silver Scrap - The silver that is sold back into the market when recovered from manufactured goods. This includes for instance, jewelry, photographic chemicals, discarded computers etc.
  • Net Producer Hedging - The early sale by mining companies of future production. Silver miners will "play" in the futures market in order to protect profit when they are concerned that the price of silver may go down. This selling of silver in the futures market acts as a hedge and is actually part of the silver supply. Selling less future production is actually de-hedging and is part of silver demand.
  • Net Government Sales - Selling silver back into the market that was previously held by a government.

Silver Market Demand

What is silver used for? How do we categorize silver demand? The following are commonly used categories of silver demand:

  • Silverware - Knives, forks, spoons, dishes, serving pieces etc. that are made of or coated with silver.
  • Industrial Applications - Computers, cell phones, monitors, solar panels, silver oxide batteries, RFID tags, water purification devices etc.
  • Photography - Silver halide processing of non-digital photography.
  • Jewelry - Sterling silver rings, necklaces, bracelets, earrings, watches, etc. - 92.5% silver and 7.5% copper.
  • Coins and Medals - American Silver Eagles, Canadian Maple Leafs, Australian Kookaburras, many collectable medallions, silver rounds, etc.

If a smart investor were to do the complete research covering all these categories of supply and demand they would have a much clearer view of the silver market - now and moving forward. Lucky for us that work is being done by an organization called The Silver Institute. You can review their work on silver supply and demand if needed.

Silver Market Price Prediction Software

The hard part for a silver investor is trying to predict what the price of silver will be in the future. This is something I am interested in. I think that it would be an exciting project to build software that would give us insight into the price of silver over a given time frame. I work for Oracle as a Software Quality Assurance Engineer by trade so this is "right up my alley."

Demand for silver is up partly because of solar panels Silver Demand is Increasing

Off the top of my head, we would first have to determine these things:

  • What are the regular supply-and-demand factors that affect the price of silver?
  • What are the external factors (outside of the silver market) that could affect the supply and demand of silver?
  • Are there commodities or securities that are highly correlated or highly inversely correlated with silver's price?
  • What is the exact correlation between each of the above factors and the price of silver itself?
  • What is the rate of change of all these factors and their correlations.

With the information above we could develop a computer algorithm that would help us predict the price of silver. Hey, everyone else is doing it. If you can't beat 'em, join 'em. LOL...

Also, off the top of my head, in no particular order, here are some specific factors to consider other than supply and demand:

  • Spot prices technical analysis
  • Future's prices technical analysis
  • US GDP (maybe world GDP)
  • Inflation/Deflation
  • Money supply
  • Possible manipulation of the silver market and its quantification
  • US employment(maybe world employment)
  • Consumer sentiment
  • Headline effect

I'm sure there are other things but we will get to them as well. This will initially be "just for fun." If anyone else is interested in contributing to the design and analysis of this algorithm let me know. And later, if anyone is interested in helping with programming or testing of this project, also let me know. I can be contacted here. I will be updating this page as I get other ideas to share.