How the silver market works

Two markets in one metal 

Silver is bought for two unrelated reasons by two populations that rarely think about each other, and nearly everything distinctive about the market follows from that split. One population buys it as a store of value: coins, bars, and the same reserve logic that applies to gold, on the strength of a monetary history that ran for millennia before it ended. The other buys it as a component. Silver has the highest electrical and thermal conductivity of any element, so it is used in photovoltaic cell contacts, electrical contacts, brazing alloys, medical coatings and a long tail of industrial applications where a cheaper substitute performs measurably worse.

The industrial half of that demand behaves nothing like the monetary half. Industrial buying is set by manufacturing schedules and by installation rates in solar generation, so it tracks industrial activity and government energy policy, and much of what is consumed industrially is dispersed in quantities too small to recover economically. That is the crucial contrast with gold: a meaningful share of silver is genuinely used up, so the above ground stock does not accumulate in the way gold's does, and annual supply and demand actually matter to the price.

Supply has its own peculiarity. Most silver is not produced by silver mines. It comes out of the ground as a by product of copper, lead, zinc and gold mining, which means the quantity mined in a given year is driven mainly by the economics of other metals entirely. A rising silver price does not call forth much additional supply, because the operators who produce most of it are making their production decisions about something else.

Where the price is set 

The venues mirror gold's. Physical dealing is centred on the London over the counter market, settled against metal held to a defined good delivery standard, with a benchmark price fixed by an electronic auction once each business day. Standardised dated futures trade on the New York exchange with a visible order book and published open interest, and the two are linked by the arbitrage that a shippable, financeable metal permits. XAG/USD refers to the spot price for immediate delivery, quoted in US dollars per troy ounce, and it is conventionally shown to three decimal places because the price is measured in tens of dollars rather than thousands.

The market is far smaller than gold's in money terms, and that single fact explains most of its behaviour. A flow of capital that is unremarkable in the gold market is large relative to silver, so the same monetary impulse produces a larger percentage move. Depth thins faster away from the best price, quoted spreads widen more sharply outside the core hours, and stop driven moves extend further before they meet a resting bid.

Who trades it 

• Industrial consumers, principally solar cell manufacturers, electronics assemblers and the chemical and brazing industries, hedging the cost of an input they have already contracted to buy.
• Base metal miners, for whom silver is a by product credit against the cost of producing something else, and refiners who separate it out.
• Retail buyers of coins and small bars, a demand segment far more significant in silver than in gold relative to market size, and one that reacts to price with a lag.
• Exchange traded funds holding allocated metal, and bullion banks financing and making prices in the London market.
• Financial participants in futures and over the counter contracts, whose positioning is reported weekly in the regulator's classification of open positions.

What moves it 

Silver responds to the monetary inputs that move gold, meaning real yields, the dollar and investment flows, and then adds a second set that gold does not have. Industrial production data, manufacturing surveys and, in recent cycles, the pace of solar installation feed directly into consumption. Policy changes affecting energy subsidies or grid connection schedules therefore reach the silver price through a demand channel that has no equivalent in the gold market at all.

The result is a metal that is correlated with gold most of the time and divergent at the moments the divergence matters most. In a broad monetary move the two travel together and silver travels further. In an industrial slowdown silver can fall while gold is flat or rising, because one of its two demand bases is contracting while the other is not. Describing silver as a leveraged version of gold is a common shorthand and an inaccurate one: it understates the independent industrial component and it implies a fixed relationship where the observed one drifts.

The gold to silver ratio 

Practitioners compare the two metals with a single quotient: the price of gold divided by the price of silver, expressed as the number of ounces of silver one ounce of gold is worth. The ratio has no theoretical anchor. It was fixed by statute in bimetallic monetary systems long ago, and since those systems ended it has ranged widely, so any statement about a level being high or low is a statement about a historical sample and about which sample was chosen. It is a relative measure and a bounded convention, not a valuation.

The final row shows why the ratio is read carefully rather than mechanically. Because the denominator is small, a modest change in the ratio corresponds to a large percentage change in the silver price, so the same ratio move is a much bigger event for silver than for gold. A ratio that has moved can also have moved because gold moved, and nothing about the arithmetic distinguishes the two cases.

When it trades 

Silver follows the same near continuous calendar as gold, from the Sunday evening open in Asia to the Friday close in New York with a short daily maintenance break, and the session and break are published per instrument in its specifications. Depth follows the London morning and the London to New York overlap, and it falls away sharply in the Asian afternoon. Because the market is thinner than gold's to begin with, the quality difference between the deep hours and the thin ones is more pronounced, and quoted spreads reflect it.

How a CFD on silver settles 

A contract for difference on XAG/USD references the spot silver price and settles in cash. No metal is allocated and none is delivered. The difference between the opening and closing price is multiplied by the number of troy ounces the contract covers, and that amount passes between the parties. Conventional contract sizes on silver are far larger in ounces than on gold, because the price per ounce is far lower, so the notional values of a single lot in the two metals are closer than the difference in unit price suggests.

Profit and loss is calculated on that full notional value while only a percentage of it is posted as margin, so an adverse move is measured against the whole contract and a loss can exhaust the margin posted rather than being bounded by it. A favourable move is measured identically. Because silver's daily percentage range is typically wider than gold's, the same nominal contract size produces a wider distribution of daily money outcomes, which is the reason margin requirements on silver are commonly set above those on gold.

A spot silver contract carries no expiry and remains open until it is closed or until the margin held against it fails its requirement. It accrues a financing adjustment for each day it is held past the daily cut off. Silver is also quoted against currencies other than the dollar, and the catalog carries XAG/EUR alongside XAG/USD; a cross quote of that kind combines two separate moves, the metal in dollars and the currency pair, in the manner set out in the guide on gold quoted in other currencies.