If you have been following precious metal prices, you may wonder why silver often pulls back much harder than gold during retreats. The explanation lies in market liquidity and silver's dual role as both an industrial and monetary metal.
Liquidity in the silver market is much lower than in the gold market, as the gold market is several times larger. When a market force impacts both, silver exhibits more pronounced volatility due to its smaller liquidity. For example, on May 14, silver retreated from $88.4 to $84.5, a 6% drop, while gold lost just under 0.3%. The depth of the gold market, characterized by more capital and participants, cushions major price moves.
Silver is both an industrial metal and a precious (monetary) metal, while gold is purely monetary. News impacting monetary policy, such as hot inflation reducing chances of interest rate cuts, adversely affects both. However, silver gets a double whammy because the outlook for its industrial use also dims. When interest rates stay elevated, manufacturing in industries like solar panel manufacturing, electronics, and electric vehicles is expected to slow, dampening demand for silver in manufacturing and depressing prices further.
Despite this, the long-term prospects of silver as an investment asset remain strong. For six straight years, silver has experienced a growing supply deficit, and short-term market movements do not remove that structural force. Industrial demand for silver is growing as AI, the energy transition, and the need to upgrade electrical grids create massive need for commodities like silver and copper. Additionally, as gold prices rise due to increased central bank accumulation, concerns about growing national debt, and geopolitical turmoil, many investors are being priced out of the gold market and opting for silver. This suggests that silver prices are bound to continue rising over the long term, given that supply has failed to catch up with exploding demand.
Firms like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) are aware of these fundamental dynamics, explaining why their exploration and mine development programs continue despite short-term swings in silver prices.
