Silver Investment Returns: Analysis for Investors
Silver Investment Returns: Analysis for Investors
Comprehensive analysis of silver performance, market dynamics, and future investment outlook in today's economic environment
Table of Contents
Silver in Today's Investment Landscape
The global economy has been suffering through high inflation. Investors are increasingly concerned about an economic downturn in the coming months. Under these conditions, it could make sense for the market to turn to precious metals like silver to preserve the value of their money, which would also support higher silver prices.
But that isn't entirely the case. While silver has recently gotten a boost, its medium- to long-term performance has been underwhelming. What are some of the factors that are influencing silver's price movements? Here's what to expect from the precious metal in the future.
What Are Recent Silver Returns?
The price of silver has gotten a recent boost after a chain of events in November. The U.S. Bureau of Labor Statistics released the consumer price index (CPI), an inflation metric, that came in cooler at 7.7% over the last 12 months for October. This was below the prior month's 8.2% increase, which could indicate that inflation may be on a downtrend.
Recent Silver Performance Highlights
A lower CPI pushed the dollar 4% lower over a 5-day period. A weaker dollar tends to drive up the prices of precious metals as demand rises. This is why silver's 30-day price performance was up about 14.5% to its current spot price of $21.71, after reaching a bottom of $17.84 in September.
Understanding the Silver-Dollar Relationship
The U.S. dollar and precious metals usually have an inverse relationship. Precious metals like gold and silver are denominated in U.S. dollars. This means precious metals are bought and sold using the dollar. As a result, when the currency strengthens, investors can buy silver at a cheaper value. Conversely, when the dollar weakens, precious metals get more expensive.
Market Correlation Insight
Professional investors track both gold prices and silver prices against the dollar index to identify optimal entry points for precious metals investments.
Global Silver Demand Remains Robust
Global silver demand remains robust, especially among retail investors. Aside from physical bullion like silver bars and silver bullion coins, this demand also shows up for exchange-traded products like the iShares Silver Trust ETF, dedicated silver funds, and mining stocks such as First Majestic Silver Corp and Wheaton Precious Metals.
These financial instruments with silver as the underlying asset expand the silver market beyond simply the one troy ounce American Silver Eagle coins. As a result, bank vaults in New York and the London Bullion Market Association (LBMA) have been drained of their silver. This could impact the trading of silver futures contracts, as well.
Market Sentiment
Market sentiment has seen risk tolerance remain fairly low amid uncertain times. Yet market conditions in the financial world may shift in the coming year, depending on the likelihood of an economic recession.
3 Factors Impacting Silver's Performance
The following factors examine what has held back rising silver prices despite the positive conditions mentioned above.
1. Inflation Dynamics
The issue of rising prices of goods and services has been top of mind for investors. While October's 7.7% year-over-year CPI rise showed cooling inflation, that number remains historically high.
2. Economic Slowdown
High inflation pressures consumers, resulting in a slower economy and lower corporate profits. This creates uncertainty that typically benefits precious metals performance.
3. Dollar Strength
The U.S. dollar index (DXY) hit a 20-year high of about 114 in September, creating headwinds for silver and other precious metals pricing.
1. Inflation
The main question being, what are the best ways to preserve the value of your money at a time when inflation has stayed elevated? While October's 7.7% year-over-year rise in CPI was a sign of cooling inflation, that number is still high compared to history.
Precious metals have long been seen as hedges against inflation. Gold is often considered the preferred precious metal inflation hedge. However, silver has its merits in this department of wealth preservation, too.
Silver as an Inflation Hedge
Silver is an alternative way to protect against inflation for the same reasons gold is, including its intrinsic value, high demand and limited supply. Diversifying your investment portfolio with silver during an inflationary period is a suitable investment to maintain the value of your money. Yet if you are expecting outsized returns from silver, this is not the investment for you.
2. Slower Economy
With inflation as high as it is, consumers are pressed to spend. This is resulting in a slower economy and lower corporate profits. This is not-so-good news for the stock market but a suitable scenario for precious metals.
When there's uncertainty in the global economy like there is today, the price of silver and precious metals tends to benefit. For example, silver is up over 14% in the last 30 days, outperforming the broader market with the S&P 500 up 3.12% over the same period.
Economic Performance Comparison
When economic activity is robust, the stock market and other investments that are higher yielding perform well. As a result, demand for silver and other precious metals may not be as strong, which could weigh on their prices.
3. The U.S. Dollar
As explained earlier in the article, the strength of the U.S. dollar can impact the value of silver and the prices of other precious metals. The U.S. dollar index (DXY) hit a 20-year high of about 114 in September.
For silver investors it can be advantageous to keep an eye on the movements of U.S. dollar. This way, you know when it's an opportune time to get a better value on your investment. This is because silver and the U.S. dollar are negatively correlated.
Currency Correlation
That means if the dollar is strong, the price of silver falls; and when the dollar is weaker, the price of silver tends to trend higher as a result of increased demand.
Thoughts on Future Returns for Silver
Investors may be frustrated because precious metals haven't performed as expected this year. As the Federal Reserve continues its battle against raging inflation, investor and market expectations for interest rates going higher is increasing. There is a debate on whether changes in interest rates and silver's performance are correlated, but some think that higher rates could be a positive sign for silver prices.
The Price Momentum Question
The price of silver has been trending higher recently but the question is: can it keep its momentum? Demand for silver bars and silver bullion coins by retail investors has been very strong since 2020.
In another camp, some investors believe rising interest rates are negative for silver prices. Higher interest rates have pushed the U.S. dollar higher this year, which has pressured silver performance. If this dynamic continues, it could keep weighing on the precious metals market and silver returns could struggle.
Factors Supporting Silver's Future Price
There are some other factors that could potentially support silver's price. These include:
- Investor demand for silver, silver ETFs, and silver miners as a safe haven asset similar to gold during a recession
- Silver as an inflation hedge during a period when higher prices in the economy are at all-time highs
- Demand for silver by the industrial sector, especially for solar panels and electric cars
These are also key reasons to diversify an investment portfolio with silver.
Portfolio Diversification
Professional investors often allocate 5-15% of their portfolios to precious metals, using both gold and silver to hedge against currency debasement and economic uncertainty. Monitoring both gold and silver spot prices helps optimize timing for portfolio rebalancing.