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Silver Price – What Drives It Higher?

Posted: Monday, September 14th, 2020

Estimated Reading Time: 2 minutes

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One cannot talk about the silver price without considering gold. The two are one of the most used alternative investments – and both rose dramatically in 2020.

In fact, gold broke higher earlier than silver. It must have been frustrating for silver investors to see the price of gold breaking higher in the summer of 2019.

Way before the coronavirus pandemic hit the world, gold ended an inversed head and shoulders pattern. A bullish pattern, it showed that gold would challenge the all-time highs if one considers its measured move.

Silver price lagged. Long viewed as the “poor man’s gold,” silver failed to follow gold in 2019. In fact, the two were negatively correlated in the months before the COVID-19.

Silver Price

What Changed for the Silver Price to Rise So Much?

Precious metals have a specific role in any portfolio – they protect against inflation. Long-term institutional investors (i.e., endowments) dedicate bigger parts of their portfolios to alternative investments. The reason – alternative investments offer a hedge against inflation.

Inflation, or the fear of it, is the main reason why people buy gold, silver, art, lumber, and so on. In the case that a currency debasement follows, alternative investments make sure that the portfolio’s value remains more or less intact.

However, what happened in 2020 is beyond such reasoning. Gold made a new all-time high, as suggested by the technical pattern. But the price of silver tripled in less than a quarter. It rose from $11 to $30 in a classic catch-up move with the price of gold.

Strong Demand from the Investment Community Sends the Price of Silver Higher

Silver has many industrial uses. As such, the imbalances between supply and demand often cause dramatic shifts in its price.

But during a crisis, an alternative investment as silver finds new “friends.” Investors add it to a portfolio if there is a fear that the fiat currency losses its value.

The regular risk-averse investor allocates a few percentages to alternative assets such as silver. Between 3%-5% is the norm, but within asset class diversification exists too.

For instance, if investors perceive that the silver price lagged the price action in gold, they may decide to reduce exposure to gold and increase exposure to silver. And so on.

What is interesting this year so far is that inflation is nowhere to be seen. Despite aggressive money printing from the Fed, the velocity of money declines.

Therefore, investors in alternative investments had the pleasure to see the price of silver rising over two-hundred percent without inflation hitting the portfolio. Will inflation follow in the period ahead, or the silver price rally is just the result of strong demand from the investment community that will fade away sooner rather than later?

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