What determines the exchange rate of silver?

Along with gold, silver is another precious metal that is often used as a form of hedge in times of economic uncertainty because there is a positive correlation between silver and gold prices. In addition, since the price of silver is much lower than the price of gold, it can be bought for investment purposes in much higher volumes.

From a trading perspective, silver price charts are much more volatile and much more tied to the economic cycle than gold. This is because silver is used in many industries. Thus, many factors determine the current silver price and in this article, we will look at the most important ones.

Which market factors determine the silver price?

The main macroeconomic factors that determine the development of the silver price on global markets include:
 

• Industrial demand

• The US dollar

• Correlation between gold and silver

• Geopolitical events and the economic cycle

Factor 1: Industrial demand

Modern industry and many products could not exist without silver due to its unique properties, which include high light reflectivity and electrical conductivity. It is therefore no surprise that silver is a metal that has seen increasing demand outstrip supply in recent years. This is clearly shown in the table below:
 

_{Demand and supply of silver. Source: www.silverinstitute.org}

The main reason for the growth in demand for silver, and the associated potential increase in the price of silver, can be found in humanity's desire to slowly transition to green energy. Components that are essential for this sector (photovoltaic panels or batteries for electric cars) need silver for their production.

And since its reserves are not inexhaustible (according to www.visualcapitalist.com, silver reserves in nature should be exhausted by 2035), unless new silver deposits are discovered, we can expect a much higher price of silver in the future.

Silver recycling will also become increasingly important, a complicated process that will also put pressure on the silver price.

Factor 2: The US dollar

Since the silver exchange rate is expressed in US dollars, the price of silver and the main US currency are inversely related to each other. You can see exactly how this relationship plays out in the silver price chart below (top) and the USD index price chart (bottom).
 

_{Silver price and USD index on weekly chart in MT4 platform}

In the lower window is a USD index showing the periods when the Fed has cut and raised interest rates in response to the economic situation. When the coronavirus pandemic hit in 2020, the Fed needed to stimulate the economy. So it began a phase of quantitative easing. This led to a weakening of the US dollar and the price of silver rose massively due to the aforementioned inverse correlation with the dollar.

The extremely loose policy then caused inflation to rise, which later led to the US dollar strengthening in anticipation that the Fed would have to start tightening the economy. Indeed, the Fed then began to raise rates sharply and the dollar continued to rise. And the price of silver? You guessed right - it was falling significantly.

This clearly shows that at least in the short term, the dollar has a significant impact on the value of silver. Currency indices such as the USD index, which you can find on our offer, can then be an important aid to speculating on the price of silver.

Factor 3: Correlation between silver and gold - gold silver ratio

The correlation between the price of silver and gold is used to determine the gold-silver ratio. This ratio is an interesting indicator that can be used to estimate the future development of the silver price.

When the ratio is high, it can indicate a faster rise in the price of silver than gold in certain economic conditions. Conversely, when it is low, the price of silver could fall or, if it appreciates, its growth is likely to be slower than that of gold.

This can be clearly seen in the following chart, where the ratio was above 118 at the time of the coronavirus pandemic outbreak and silver then appreciated faster than gold.
 

_{Correlation between silver and gold and gold silver ratio on the weekly chart. Source: www.tradingview.com}

Factor 4: Geopolitical events and the economic cycle

Major international events have an impact on the silver price. For example, one of the key factors affecting the silver price in 2022 was the start of the Russian-Ukrainian war, which had a major impact on economic developments as well as on commodity prices. One of the consequences of the war was a rise in energy commodity prices, which triggered inflationary pressures. This, combined with recession fears and a strengthening US dollar, has led to a weakening of silver prices in Q2 and Q3 2022.
 

Conclusion

The silver exchange rate is influenced by many factors and in this article we have listed some of them. It can be seen that - as with gold - the US Fed and the value of the dollar are also major factors in silver prices. With silver being an industrial commodity, the economic cycle also plays a major role in its price.

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