Silver is one of the most popular trading instruments in Forex trading. If you look at the history of silver prices for the last couple of years you will see that the price for silver is constantly grows, despite the short-term corrective movement.
There are few reasons for the silver value growth. Among them is the increase in consumption of silver, and the desire of investors to diversify their investment portfolio by using silver as an additional financial instrument.
As well as silver, gold is also rising in price and is also very attractive investment in Forex trading. The growth of gold was explosive because of the numerous aid programs and a start of printing money machine of USA. Therefore, the USD weakened during the last couple of years big investors started to invest their funds in other instruments, including the precious metals and other commodities.
Despite all the measures to strengthen the USD, investors’ confidence in USD currency stays ambiguous. Therefore, today Forex traders are using more stable instruments for their investments like gold, silver, JPY, etc.
Silver is a very specific market, and its peculiarity is in a relatively small volume. Because of this silver market is vulnerable in the sense that a large investor can “lay hands on the market,” dictating the price of silver. It has already happened few decades ago. Big investor brothers Hunt started buying silver. Their capital was estimated at 6 billion USD. By the end of 1973 brothers Hunt bought contracts for the purchase of silver worth 35 million troy ounces, then the value of this precious metal has risen to 2.90 USD and continued to rise.
In less than 2 months silver price reached 6.70 USD, showing a fantastic rate of growth and profitability. For 10 years the brothers Hunt purchased about 150 million ounces of silver, which is about 5000 tons. This figure corresponds to 50% of USA stocks and 15% of the world’s one. By January 1980 the value of silver reached a historical maximum – 52.50 USD per ounce.
Due to the urgent intervention of the Commission on Trade (CFTC) and the Chicago Mercantile Exchange, that decided to impose restrictions on the amount of trading positions and to increase margin requirements, it completely changed the market. These changes led traders to sell silver in order to satisfy margin requirements. As a result, silver prices fell sharply – from 50.36 to 30.25 USD during 3 days, after which the silver has committed to roll back to a more reliable minimum within few days to 33.10 USD. Two months later the value of silver has returned to a level of $ 20 or even less.
A similar situation could be observed at the beginning of 2011. The reaction of the regulators was similar: after the introduction of the new margin requirements for silver its price dropped significantly, as both small traders and big investors had to fix their trading positions accordingly. This is a standard measure that is needed in order to stabilize the market during the periods of strong volatility. The aim of such measures is to protect market’s participants from additional risks.
What To Trade: Gold Or Silver?
Why many Forex traders prefer to trade silver but not gold? There are several reasons for that.
First, the silver market is influenced by a large number of private investors and Forex traders, while a yellow metal market is tightly controlled by government agencies.
Secondly, gold is used only in jewelry, as well as for investment. Only 10% of gold goes to the actual production (dentistry and electronics). On the other hand, silver has a steady demand: it is needed in manufacturing, high technology, medicine, food industry, etc. Silver is used in the manufacture of paper, textiles and many industrial goods. In other words, the use of silver in the industry is broader than of gold that is a very important factor for stimulating the growth of its value. And as you know the price growth is possible only in case of maintaining a high industrial demand. Besides, due to the fact that silver demand has increased during the global economic recovery, the price of silver grew very significantly.
Because of the extensive use of silver in the industry, it is difficult to carry out its active buying. As soon as the risk of re-recession in the global economy increases, the trading positions of investors begin to diminish, as traders fear that the demand for silver will fall as it happens to other metals used in industry. Thus we can conclude that the silver demand coming from investors only partially determines the overall demand for silver.
Third, global demand for silver is not covered by mining silver reserves of the Government at the moment. Those silver reserves, which are explored until today are enough for about 15 years if new fields are not discovered in the near future, which is unlikely.
All the above factors may sooner or later create a shortage of silver supply, even when regulators fail to bring the situation under control. If all goes on according to the described scenarios the silver price could reach 300% or more, thereby reducing the gap with the yellow metal to the proportions of 16:1 (16 ounces of silver will be equal to 1 ounce of gold).
There are certain rules that small Forex traders and big investors use in financial markets. If there are many people in the market who don’t understand world economy and start buying certain assets – this is the most accurate signal that very soon the “bubble” will burst out.