The Fascinating Correlation Between Silver Prices And Market Conditions

Investors look at the long-term viability of underlying assets and make their decisions accordingly. Traders on the other hand look at the short-term movements in underlying assets and profit off the volatility that exists in any particular market at any given time.

One of the markets that have undergone tremendous volatility of late is that of precious metals. Gold and silver are typically the go-to safe havens when equities markets are on the decline. This is precisely what has happened after the China equities rout that saw trillions of dollars erased from global stock markets. Much of the volatility that has been felt in equities is a direct consequence of structural weakness in China. Recent economic data from Beijing indicates that imports have declined by 20.4% in China for year-on-year for September. This sent emerging market bourses into the red, and dragged down developing markets too. Import data is particularly important when it comes to the world's second-largest economy, since China is a major consumer of commodities.

This is especially true when it comes to energy and metals. Many of China's suppliers are multinational corporations based in emerging markets. As such, we have seen declining demand placing immense pressure on the revenues of these companies, resulting in layoffs, falling profits and now the shuttering of mines across Africa and South America. Glencore PLC announced that it would be temporarily shutting mines in the Democratic Republic of Congo and Zambia and elsewhere. Recently, Glencore shuttered the Eland platinum mine in South Africa with 970 jobs eliminated overnight. As one of the precious metals, global platinum production has now diminished and the hope is that demand and supply will reach an equilibrium point above the current price point. That same conventional wisdom applies to all precious metals and all commodities, silver included. If additional mines are shuttered then production capacity diminishes and the theory is that price should increase ceterus paribus.

Chart – China's Appetite for Silver and Gold

 

 

 

5-Year Price of Silver

Precise figures for China's reserves of gold and silver are not readily available, but the latest estimates place China in ninth place in terms of gold reserves at 3.4% of the global tally of all gold. That amounts to 1900 tonnes (January 2015). China is much more dominant in terms of its silver reserves. According to the latest figures, China holds 8.1% of the world's silver reserves at 43,000 tonnes. The vast majority of China's silver reserves are located in Jiangxi, Hunan, Yunnan and Inner Mongolia. Surprisingly, China does not have any platinum reserves. Another reason why we are seeing an uptick in the price of silver even though there is a decline of 20.4% (yoy for September) in terms of China's imports is that China mines approximately 70% of its silver within its own borders. It does this by producing silver as a byproduct of other mining operations (lead, copper and zinc).

We have recently seen sharp declines on the Shenzhen index and the Shanghai Composite index, followed by similar declines on major European and North American stock markets. One thing that traders and investors know about precious metals like gold, silver and platinum is that they gain favour when equities markets sour. Over the past week we have seen the price of silver move from $15.69 per ounce to $16.14 per ounce. If we extrapolate further back to a 1-month scenario, silver was trading at $14.39 per ounce on 15 September and is now closing in almost $2 higher in just 30 days. Silver is nowhere near its glory days as a precious metal. If we turn the clocks back to 2011, silver was trading at $47.47 per ounce on 15 April. The precious metal has lost some $30 an ounce in just over four years. However the reversals that we are seeing now are certainly a positive sign for short-term traders, notably binary options traders looking to place call options on this precious metal.

Why is Silver Enjoying a Mini Rally Right Now?

 

Recall that silver and gold are go-to safe havens when equities markets are weak. We are also seeing a confluence of factors such as the Fed's decision not to hike interest rates even though the US economy appears to be structurally sound. This shows that the 0% – 0.25% short-term interest rates in the US are unlikely to change in 2015 given global economic weakness. The Fed is not confident that the economy can withstand the repercussions of an increased interest rate. What this will do is strengthen the US dollar, hurt American exports, weaken emerging market currencies and cause a decline in commodities demand overall. This will come back to bite the US economy and send it into a contractionary phase. This hypothesis may or may not come to pass, but the fact of the matter is that uncertainty and anxiety are pervasive in global markets right now. The US dollar has receded further on the back of weaker than expected retail sales figures this last week and this is also leading to an appetite for gold, silver and platinum.

Now, the demand for silver will likely be maintained as a result of its widespread applications in the world. Silver is used in all manner of industries including energy reduction, jewellery, decor, tableware, insulation, coins and medals, the automobile industry, green technology, medical use, nanotechnology, bearings, electronics, brazing/soldering, batteries and so forth. Long-term, investors and traders agree that the price of silver will rise dramatically. In this sense, it is a terrific store of value since it is highly undervalued at this point in time. As a result of its widespread usage, there will always be an exceptionally high demand for this precious metal. The countries that produce the highest output of silver include Mexico, Peru, China, Australia, Chile, Bolivia, Russia, Poland, the United States and Argentina. At least 6 of those countries are considered developing economies, hence there is real concern about the impact of a strong US dollar on the fortunes of these countries’ economies.

Sage Advice: My advice is the same for traders looking for quick gains and investors looking for long-term gains: Call Options in the short-term for binary options traders and go long on silver if you're an investor.