Silver Investment Returns: Analysis for Investors

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. This can preserve the value of your 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. 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.

Chart comparing the performance of gold prices and silver prices. (Silver is the orange line.)

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.

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 Assocation (LBMA) have been drained of their silver. This could impact the trading of silver futures contracts, as well. 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.

The following reasons will examine what has held back rising silver prices despite the factors mentioned above.

3 Factors Impacting Silver’s Performance

1. Inflation

The issue of rising prices of goods and services in the economy has been top of mind for investors. 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 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. On the other hand, 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. 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.

The U.S. dollar has rallied considerably against its peer currencies in 2022.

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.

Demand for silver bars and silver bullion coins by retail investors has been very strong since 2020.

The price of silver has been trending higher recently but the question is: can it keep its momentum?

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.

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.

Written by Paulina Likos

Read more about investing and precious metals from the expert authors at Gainesville Coins:

Gold Investment Returns: What Investors Should Expect

Gold Mutual Funds vs. Gold ETFs: What's the Difference?

Investing in Gold vs. Silver

How to Invest in Gold and Silver IRAs

Guide to the London Silver Fix