Academy News Why and how to trade silver

History of silver Why trade silver How to trade silver What affects the price of silver How to choose a broker

Why and how to trade silver

Alongside gold, silver is one of the oldest trading commodities. Although silver coins are no longer used as currency today, the price of this precious metal is still rising. This makes silver one of the popular investment opportunities among conservative investors. What affects the price of silver, when it’s the right time to invest in silver, and what ways can be chosen for that? This article discusses this.

History of silver in 3 paragraphs

Silver has been continuously associated with human history for about 6,000 years. From the archaeological finds, we are able to tell that the first sophisticated methods for silver mining were used around 2500 BC by the Babylonians. Still, it was more about silver as a commodity than a currency. For silver to be used for that purpose, we would have had to wait till 550 BC. This is the oldest known instance of silver being used in the form of coins by none other than the Romans. However, other great civilizations followed (China, Japan), which led to the introduction of silver in the form of coins as a means of international trade.

The importance of silver as currency also grew with the establishment of the USA. In 1794, silver dollar coins began to be minted here, which were in circulation for another 80 years.

From 1794, the minting of silver dollars in the USA began, it took 80 years, then silver lost this position. The beginning of the end of silver, as currency, was the introduction of the so-called gold standard in 1875. This enabled the convertibility of the dollar into gold and thus significantly reduced the value and importance of silver.

Why trade silver

Because silver is one of the so-called "safe harbors"

There are assets that investors seek for their ability to withstand market storms caused by economic or political crises. These assets are referred to as "safe haven", not only because they are able to withstand turbulent markets, but in some cases even gain at price when the prices of other investments skyrocket. Silver is one of these assets.

Because the price of silver tends to rise

Silver is increasingly used in the industry mainly for its chemical properties. The demand for it is therefore ever higher, while new deposits of this precious metal are rarely ever discovered. If we also add to this equation the fact that the extractability of many deposits is economically disadvantageous, and thus mining is abandoned here, we get a situation where there is a high demand, but an even lower supply. This only indicates that prices of silver more or less tend to rise in the long run.

Unlike money, silver resists inflation

Keeping your capital safe in a bank (savings) account can be a viable option for maintaining, or increasing its value. The problem arises when inflation rises and the currency loses its value. As we have mentioned, silver tends to gain in value, and inflation, as a precious metal, is not affecting it. Investing in silver is therefore one of the possible choices to protect your capital from inflation.

Because silver is much cheaper than gold

All the previously mentioned reasons to trade silver can be considered in the case of gold as well. It also preserves value, resists inflation and its price tends to rise in the long run. However, gold is approximately 75 times more expensive than silver, which makes it a relatively financially demanding investment. So if you decide to buy gold in physical form, a brick weighing 1000g will cost you almost € 55,000. In the case of silver, the price of a brick with the same weight is approximately CZK 750.

How to Trade Silver

Purchase of investment silver in physical form

One way to invest in silver is to buy bricks, jewelry, ingots, or commemorative coins made of this precious metal. However, this method has its pros and cons.

Benefits

Maintaining the price, protection against inflation, a safe haven - as we have already mentioned, having silver in physical form pays off mainly because of the long-term increase in its price and its ability to withstand the effects of inflation. So if you can hold your silver for a long time, you have a chance to make it an attractive investment.

Disadvantages

Artistic processing margins for some products - By buying silver commemorative coins or jewelry, you get not only precious metal but also a product that has been processed in some way, which will be reflected in its final price. So if you are going to invest in silver by buying these products, you must keep in mind that the overall year-on-year increase in the price of silver must be such that it will pay for this margin in the long run. At the same time, you must have a trustworthy buyer who will take the coins or jewelry from you at a price higher than the price of the silver contained here, otherwise, the investment will not pay off.
Beware of fraudsters - When buying silver, it is necessary to beware of possible fraudsters selling counterfeits or silver of lower quality. Therefore, it pays to look only for recognized and long-acting dealers or institutions.
Storage - A drawer in your bedroom is not highly recommended for storing the silver you have purchased. The safe is therefore a slightly more feasible option. Even so, there is a certain risk that someone will somehow learn about your silver and your investment will not be a long-term one anymore. Therefore, another option is to store silver in the safe-deposit boxes of some banks. However, you pay certain annual expenses for this option, which cuts off part of the interest on your investment.

Online silver trading

In today's time of technology, online silver trading is undoubtedly on the rise. And no wonder.

Online silver trading is:

More convenient (anyone with a computer, tablet, or smartphone with internet access can trade).
Cheaper (minimum deposit for opening a trading account starts at approx. € 100).
More flexible (in some of the forms of online trading it is possible to speculate on a decrease in the price of silver).

Trading silver for futures contracts

When trading silver through futures contracts, you buy a future supply of a certain amount of this precious metal in its physical form. However, this does not mean that you have to set up a safe at home, as we mentioned a little above in the case of investing in silver in physical form. Each contract has a predetermined date when the delivery of silver in its physical form should take place. This is called the expiration time. Therefore, if you manage to "get rid" of the contract and sell it before it expires, you will not need a safe.

If you are not interested in speculating on silver prices in the short term, but would rather want to invest in silver in the long run, we would rather not recommend this method of trading.

Silver trading through ETF portfolios

ETF portfolios are a kind of set of shares or bonds of companies in which the investor invests at once. Their composition always follows a certain concept. In the case of silver, the ETF portfolio will contain shares or bonds of companies that mine, process, etc. This method of investing in silver is passive, long-term and usually with the possibility of paying dividends.

Speculation on the price of silver with CFD contracts

A very popular method is trading through so-called differential contracts. These are speculative papers created by the broker, the price of which is usually derived from the price of futures contracts or the spot price of silver. So the trader does not directly own silver, he only speculates on its price (the instrument designed for this is called XAGUSD - it is, therefore, the relationship between the price of silver and the US dollar).

The advantage is that in the case of differential contracts, in addition to growth, it is also possible to speculate on a decline and it is, therefore, possible to profit in both directions. This means that the trader has the opportunity to earn regardless of whether the silver is thriving, and the price is rising, or vice versa. In this case, it is crucial to correctly estimate the direction in which the price of silver will develop. Another reason why CFDs are an increasingly preferred form of silver trading is the ability to leverage to trade larger amounts than your original deposit.

In this sense, differential contracts are similar to futures contracts in that they are used for speculation, but with the difference that the differential contract cannot expire. Given that these contracts are created artificially by the broker, it pays to invest in a quality broker with transparent trading conditions and a good reputation among other traders.

Why CFD contracts:

You can trade with smaller capital (unlike the above-mentioned methods of trading, when you need capital in the hundreds of thousands, thousands to tens of thousands will suffice for difference contracts, Purple Trading offers to open an account with a minimum deposit of CZK 2,500).
Leverage (determines the ratio of the amount of capital you put into a given trade to the funds provided to you by the broker. At Purple Trading, we offer 1:20 leverage for silver trading - ie with $ 100 you can open a trading position of $ 2,000. then corresponds to both profit and potential loss. Therefore, it is necessary to use the leverage wisely).
Possibility to speculate on the rise and fall of the price of silver - With CFD contracts you are not the owner of silver, which means that not only are you not worried about the fall in prices of this precious metal, but you even have the opportunity to profit from it.

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The relationship between silver and gold and what affects the price of silver

The price of both metals is developing quite the same
With few exceptions, if the price of gold falls, the price of silver will fall, and vice versa. In most cases, when trading in silver, you can orient yourself according to the prices of gold. But beware - silver is far more volatile, which means that daily price fluctuations are much greater.
American dollar
As we mentioned at the beginning, the relationship between the US dollar and silver is now a matter of history. However, this does not mean that a certain correlation between the prices of silver and the US dollar cannot be observed. In most cases, the price of silver falls at the same time as the strengthening dollar. This is mainly due to the fact that this precious metal is perceived by investors as the so-called "Safe Harbor", i.e. a commodity into which money flows in times when the dollar (and markets in general) is failing. And if the dollar (and the markets) is doing well, investors are sending their money elsewhere, lowering the price of silver.
Oil price
The level of oil prices often stems from current geopolitical development and the resulting overall uncertainty in the markets. In times of crisis or war, we can also see an increase in the price of oil. And the price of oil usually goes hand in hand with the price of silver. Again, this is due to the search for the already mentioned "safe harbor", i.e. an investment that is suitable in times of crisis. And that's exactly what silver often is.
Supply vs. demand
Every textbook of economics will agree with us that once we talk about the price of anything, the relationship between supply and demand cannot be left out. This applies also in the case of silver. This is because while the demand for this metal is constantly growing (especially due to its wide industrial use), the supply is worse. New silver mines are being discovered less and less, and the supply is thus declining. If you want to have an overview of the potential movement of silver prices, we recommend monitoring the volume of production in the world's largest mines.

How to choose a broker suitable for silver trading

If you are considering trading silver, you should first think through choosing a quality broker. In addition to buying silver in physical form, you will need an intermediary between you and the market for all variants of trading (CFDs, ETFs, Futures, buying at a spot price), and this role is played by the broker.

Trading conditions - in case you are going to actively trade/speculate, you will need excellent trading conditions. In particular, you should be interested in the execution speed (the response with which your trade order reaches the broker's server and from there the market. This is stated in milliseconds and the closer this metric is to 0, the better) and spread prices (the difference between the bid and ask price, again, the lower, the better). In Purple Trading, we pay attention to the maximum possible level of transparency of our services, so if you are interested, you can view statistics on the execution speed and spread prices (silver can be found as the XAGUSD symbol in the CFD column).
Broker License - In general, brokers based in the EU follow a higher degree of transparency due to regulations protecting clients. The so-called Offshore brokers, on the other hand, can offer higher leverage (up to 1: 400) and often lower service fees. However, the client/trader is not protected to the same extent as with the EU brokers. For example, negative balance protection, which prevents you from falling into the red in your trading account, is an obligation for EU brokers, while not for off-shore brokers.
STP vs MM model - Based on how brokerage firms process their clients' trading orders, they can be classified into several categories according to so-called models. The most basic divisions are STP (Straight Through Processing) and MM (Market Maker). The STP broker acts as an intermediary between the client and the market in which his order is matched with the counterparty, thus it’s being executed. Then there is MM who settles clients' orders directly with itself and thus artificially creates the counterparty. This basically means that if the client doesn't make money, the MM broker makes money and vice versa. This can create space for manipulating client orders, which is also proven by several cases from the past. However, this is not the case with Purple Trading, which operates on the basis of STP.
This topic is quite important, but it is not very often mentioned in discussions between traders. So if you are interested, you can read more about it here.

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