If you have been following precious metal prices for a few months, you may be wondering why the price of silver often pulls back much harder than the price of gold during those retreats. We explain why this usually happens.
For starters, liquidity in the silver market is much lower than liquidity in the gold market. This is because the gold market is several times larger than the market for silver. Consequently, when a market force impacts both markets, the silver market exhibits more volatility because its liquidity is smaller and therefore reacts in a more pronounced way. For example, on May 14 the price of silver retreated from $88.4 to $84.5, a 6% drop.
In contrast, gold lost just under 0.3% on that day. This can be explained by the depth of the gold market, which is characterized by a lot more capital and participants, so any development that impacts the market rarely causes a major price move.
It is also worth noting that silver is both an industrial metal and a precious (monetary) metal, while gold is purely a monetary/precious metal. How does this cause silver to drop harder?
When there is news that impacts monetary policy, for example hot inflation that reduces chances of interest rate cuts, non-yielding precious metals take a hit. In this case, both gold and silver are adversely affected. However, silver gets a double whammy because the outlook for its industrial use also dims. When interest rates stay elevated, manufacturing activity in industries like solar panel manufacturing, electronics and electric vehicles is expected to slow down.
This outlook of reduced industrial activity dampens the demand outlook for silver in the manufacturing sector, and that in turn depresses prices. You can therefore see that one news item like hotter inflation impacts the precious metal demand for silver while also weakening its industrial demand outlook, thereby having an outsized impact on silver prices. Gold is impacted once, silver is impacted twice; hence the steep drop in silver prices when compared to the drop in gold prices.
Does this impact the long-term prospects of silver as an investment asset? Not really. For six straight years, silver has experienced a growing supply deficit, and short-term market movements don’t remove that structural force. Additionally, industrial demand for the metal is growing as AI, the energy transition and the need to upgrade electrical grids creates a massive need for commodities like silver and copper.
Also, as gold prices rise higher due to increased central bank accumulation, concerns about growing national debt and geopolitical turmoil, many investors are also being priced out of the gold market and are opting for silver. This suggests that the price of silver is bound to continue rising over the long term given that supply has dismally failed to catch up with exploding demand.
Firms like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) are firmly aware of these fundamental dynamics and this explains why their exploration and mine development programs are pressing ahead despite the short-term swings in silver prices. As an investor, it would be helpful for you to also keep the bigger picture in mind, because short-term price movements can cloud clear judgment.
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