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How Outside Markets Affect Silver Prices

How Outside Markets Affect Silver Prices
June 06
00:41 2011

A relatively small proportion of the silver market is made up of central banks or people who actually use silver in any way (either for commercial use or as a currency). Rather, it has become a haven for financial investors looking for a “safe” asset to diversify their portfolio in uncertain economic times. A lot of money has been pumped into the gold and silver markets for this reason, from retail investors as well as large funds. Because of this, whenever the performance of some unrelated market affects these investors’ overall liquidity, it will also affect the silver market. Silver has established, fundamental relationships with certain other outside markets, and these relationships are evolving.

Gold may be the “granddaddy” of the metals markets, but silver is easily second in terms of highest trading volumes and the most money being traded. As its price changes, the prices of other precious metals behave quite similarly. As you’d expect, gold, platinum, and palladium market returns are highly correlated with the silver market’s returns. Non-precious metals like high-grade copper, aluminum, and hot-rolled coil steel are also correlated to the silver market’s movements, but not so closely because they are subject to more changes in their industrial supply and demand situation than precious metals.

Each individual country and currency has its own unique relationship with silver, especially because people in some developing countries use silver in more ways and different ways than we do in the United States, but the U.S. dollar index is nonetheless a good proxy to use when discussing silver’s relationship to currencies, because the index itself is made up of a basket of foreign currencies including the Euro, the Japanese yen, the Great British pound, the Canadian dollar, the Swiss franc, and the Swedish krona. This U.S. dollar index is strongly negatively correlated to the silver market. Over the past five years, weekly returns of silver and the U.S. dollar index have posted a -0.45 correlation.

Stocks and commodities
Most likely because silver has evolved into a market for traders to park their long-term investments, silver prices have grown a very strong correlation to the stock market since 2009. Prior to that time, weekly returns of silver and the S&P 500 were positively correlated, but not with the same strength they display now that both markets seem to attract the same investment dollars. This argument is also true for commodities in general, which should come as no surprise when one considers that precious metals make up 17% of the CRB Commodity Index, for instance. The correlation between overall commodity indices and stock market indices, or between overall commodity indices and between silver, is looser than it is between silver and the stock market, but it’s still positive.

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