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How Other Commodities Affect Silver Prices

June 08
16:55 2011

Silver’s strange place in the investment sphere as somewhat of a substitute global currency makes it behave unlike most other commodities. And yet by definition, silver is still a commodity. One silver futures contract represents a standard sample of 5,000 troy ounces of silver which assays to a minimum of 999 fineness (a grading specification), and each sample is interchangeable with any other sample. That’s the same standardized structure that makes commodity futures and options trading efficient.

So the mechanics of trading silver as a financial asset are identical to any other commodity futures and options trading, and therefore silver can be considered a member of the broader commodity market. It’s not only included in overall commodity indices, but its volume of trade and the amount of money invested in its market dwarfs many other commodity markets.

Silver is also different than other commodities in the way it’s used and therefore analyzed. Its closest cousins, of course, are the other precious metals markets: gold, platinum, and palladium. Like silver, these metals may have some industrial uses, but are mostly valued for their rarity and thus, their ability to represent and hold inherent value. In some senses, they can be substituted for currencies, and investors treat them as a safe haven like cash, when economic concerns make cash itself risky. So because they are similar markets, silver and other precious metals trade similarly and their market returns have a very close relationship to one another.

The relationship silver has with any other commodity will almost certainly be less strong than the precious metals sector, simply because other commodities are subject to more direct supply and demand concerns than silver. Even copper, which is a hotly-traded metal futures market, isn’t all that closely related to silver, because it is considered part of the “industrials” commodity sector, alongside cotton. Copper is commercially bought and sold for use in electronics transmission and appliances.

Grains and livestock are also commodity futures markets that attract some of the same flow of money as silver sees from individual investors and funds looking to diversify their overall portfolios. However grains, like corn, soybeans, wheat, rice and oats, are generally annually produced and therefore subject to seasonal supply swings as well as constantly changing demand. This limits how much their returns will resemble silver. Livestock futures markets are more closely related to grain prices than they are to silver prices.

Other commodity markets which can be compared to silver include the “softs”: cocoa, coffee, orange juice, and sugar. There are also, of course, the energy markets: crude oil, gasoline, heating oil, natural gas, ethanol, and electricity. Crude oil and gold are probably neck-and-neck in the race for which commodity gets talked about most in the media, and which attracts big fund money.  Silver rides on gold’s coattails for attention. Perhaps it’s not surprising then, that when it comes to their actual day-to-day trading relationship, since 2009 silver and crude oil’s returns have shown a positive correlation over 40 percent.

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