Supply and demand is the fundamental determinant of silver prices. Price would typically fall when supply exceeds demand, and when demand outstrips supply, prices would rise. Price fluctuations would in turn affect demand and supply – when prices rise, supply would increase while demand would decrease, and when prices fall, demand would increase and supply would decrease. Factors affecting production and supply include the discovery and excavation of new mines, the application of new technology, overhaul as well as strikes at producers, and import and export policies. Factors affecting silver demand include the trend of development in silver-consuming industries and the preference changes in silver investment.

Silver is an important raw material for industrial production, and can also be seen as safe-haven assets, so its demand is closely related with economic and political situation. Economic growth would drive silver demand, thus fuelling gains in silver prices, but when economy stagnates, shrinking demand for silver would cause silver prices to fall. In recent years, governments in the world have adopted loose monetary policies and proactive fiscal policies to counter the impact of the global financial crisis, injecting a huge amount of liquidity into the financial markets. Prices of silver, which is seen as safe-haven assets against inflation, climbed steadily on the back of rising investment demand. When monetary loosing came to an end, silver prices fell sharply.

The Euro zone sovereign debt crisis has not yet been effectively addressed; emerging economies still face relatively high inflationary pressures; the Japanese earthquake and the nuclear accident caused by tsunami, as well as the turbulence in West Asia and North Africa regions added to global economic uncertainty. All these variables would have a direct or indirect impact on silver prices.

International silver transactions are generally denominated in the U.S. dollar, while major global currencies have all adopted the floating exchange rate system. Judging from experience, exchange rate changes of the U.S. dollar against major currencies would cause some short-term fluctuations in silver prices, but would not change the longer-term trends of the silver market. Silver and gold were both used as currencies in human history, as they share similar financial properties. Therefore, silver and gold prices are positively-correlated to some degree, but only in terms of long-term trends. In the short term, positive correlation between silver and gold prices is not very obvious, with silver prices more volatile than gold prices.

Funds, which have been playing a much bigger role in silver trading, are fuelling price fluctuations. Funds have advantages in terms of information gathering and technology, so they are to some extent prescient and forward-looking. Silver ETFs (Exchange Traded Fund) have grown rapidly in recent years with higher open interests. The investment directions of silver ETFs and other funds have become a factor that would influence movement in silver prices. An analysis of funds’ net positions would help judge future trends of silver prices.

Import and export policy is an important factor to influence supply and demand. For example, China’s move to reduce tax rebate rates from 13% to 5% for silver and related products starting July 1, 2007, and its move to scrap the 5% rate altogether on August 1, 2008 directly impact silver exports, thus affecting silver supply and prices in both domestic and overseas markets.