Silver Demand
The price of silver, as each price, is determined by the market forces of demand and supply. The demand is the amount of a good demanded for purchase at each price. Therefore, the demand for silver is the amount of silver demanded for purchase at each price. The silver demand is often analyzed on an annual basis and divided into jewelry demand and silverware, industrial demand, and coins and bars.
Silverware Demand
The silverware demand is a demand for silver tableware. Silver is malleable and has high luster and reflectivity, so it is a perfect choice for jewelry and silverware, especially that it is significantly less expensive than gold. Its antibacterial properties are another reason why jewelry and silverware are two traditional uses of silver.
Silver Jewelry Demand
The jewelry demand is a demand for silver for jewelry production. In the financial press, there are countless articles claiming that demand for jewelry drive silver prices. However, consumers do not drive prices, because when prices rise, they buy less, and vice versa. Indeed, the rising prices of silver in the 1970s and 2000s coincided with declining jewelry demand, while the bear market in 1980s and 1990s was accompanied with steady rise in demand for jewelry (see the chart below).
Chart 1: Jewelry and silver demand (in million ounces; red line, right axis) and average annual silver prices (blue line, left axis) from 2008 to 2017.
Silver Industrial Demand
The industrial demand is a demand for silver for industrial or technical applications. Silver is used in electronics (because it has the highest electrical and thermal conductivity of all metals), in photography (silver halides are photosensitive), medicine (silver has antibacterial properties), in the production of high-quality mirrors (silver has high optical reflectivity), in the chemical industry (silver has fine catalytic properties), or in brazing and soldering (due to silver’s high tensile strength and ductility.
The industrial demand does affect the price of silver, as the metal is widely used in the industry. However, silver has dual nature: it is not only an industrial commodity, but also a monetary asset. This is why it has strong positive correlation with the price of gold, which is not driven by technology. The link between industrial demand and the prices of silver is, thus, not perfect, as the chart below shows.
Chart 2: Industrial demand (in million ounces; red line, right axis) and silver prices (blue line, left axis, annual averages in $) from 2008 to 2017.
Silver Investment Demand
The investment demand is a demand for silver for investment purposes. This is the most important category of demand for silver. What is crucial is the fact that the investment demand is much higher that reported by the Silver Institute or many analysts. Otherwise, how else do we explain the fact that the amount equal to annual mine supply is changing hands in a few weeks on the London market alone. Thus, silver should not be analyzed exclusively as a commodity, but investors should also take its monetary aspect into account. Just like with other monetary assets, the demand for silver comes from the marginal buyers. For instance, if the demand for silver increases it means that buyers of silver value the bullion more highly and thus are willing to pay higher price.
What does influence the demand of silver? We have already mentioned jewelry and technology. However, silver has very high positive correlation with gold (often more than 90 percent), its market is also influenced, just like gold, by investment factors such as: the level of confidence in the economy, the U.S. dollar exchange rate, the real interest rates, and so on. For example, when people lose the confidence in the U.S. economy, they could buy gold and silver more willingly.
Silver Physical Investment Demand
The silver investment demand is made up of direct ownership of bars and coins, or indirect ownership via Exchange-Traded Funds (ETFs) and similar products. The former component is known as silver physical investment demand. Silver bars and coins are viewed as a store of value asset by many investors. In particular, if somebody does not trust the contemporary monetary system, physical silver seems to be an interesting investing alternative, especially that silver bars and coins are much cheaper than the gold ones.
Silver ETF Demand
Although physical silver is an ultimate safe haven hedging against the collapse of the financial system, many investors prefer investing in silver ETFs. They invest primarily in hard silver assets, which are held in trust by the fund manager or a custodian, and aim to track the price of silver. The main reason behind the silver ETF demand is to have exposure to silver prices but with greater convenience – it is much easier to build and liquidate positions in silver ETF than in case of physical silver. The biggest and probably the best known silver ETF is iShares Silver Trust.