Silver price (1)

Silver price

The price of silver is notoriously volatile, as it fluctuates between industrial and store of value demands. At times this can cause wide ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver ratio is often analysed by traders and investors. Over most of the 19th century the gold/silver ratio was fixed by law in Europe and the United States at 15.5, which meant one troy ounce of gold would buy 15.5 ounces of silver. The average gold/silver ratio over the 20th century was 47.0.

Annual average price of silver. The large spike occurs in 1980

Year to 31st December	Silver price US$/oz	Gold price US$/oz	Gold/silver ratio
1910	0.54	20.67	38.28
1920	0.54	20.67	38.28
1930	0.33	20.67	62.67
1940	0.35	34.50	98.57
1950	0.80	40.25	50.31
1960	0.91	36.50	40.11
1970	1.64	37.60	22.93
1980	15.65	641.20	40.97
1990	4.17	423.80	101.63
2000	4.60	272.15	59.16
2005	8.83	513.00	58.10
2006	12.62	628.20	49.78

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per oz. for first time by late April of 2006. The monthly average price of silver was $12.61 per oz. during April 2006, and the spot price was around $13.68 per oz. on April 6, 2007.

Factors influencing the silver price

Private and institutional investors

From 1973 the Hunt brothers began cornering the market in silver, helping to cause a spike in 1980 of $49.45 per ounce and a reduction of the gold/silver ratio to 17.0 (gold also peaked in 1980, at $850 per ounce). However a combination of changed trading rules on the New York Mercantile Exchange (NYMEX) and the intervention of the Federal Reserve put an end to the game. In 1997, Warren Buffett purchased 130 million ounces (4,000 metric tons) of silver at $4.40 per ounce (total value $572 million). Similar to gold, the silver price has more than doubled in value against the United States dollar since December 2001. On May 6, 2006 Buffett announced to shareholders that his company no longer held any silver. In April 2006 iShares launched a silver exchange-traded fund, called the iShares Silver Trust (NYSE: SLV), which as of April 2007 held 130 million ounces of silver as reserves.

The large concentrated short position

The CFTC publishes a weekly Commitment of Traders Report which shows that the 4 or fewer largest traders are holding 90% of all short contracts. This level of concentration is unprecedented in any commodity, and should arouse suspicion. Furthermore, these 4 or fewer traders are short a total of 245 million ounces (as of April 2007), which is equivalent to 140 days of production.

Industrial demand

The use of silver in items such as electrical appliances and medical products has increased since 2001. New applications for silver are being explored in batteries, superconductors and microcircuits, which may further increase non-investment demand. The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long term rise in industrial usage. However, offsetting this is the enormous reduction in the use of photographic film, which uses silver halide, due to the advent of digital cameras.