If you’re new to the idea of precious metal trading you might not be familiar with the idea of a spot price. It’s something you need to learn about right away because it’s the key to success as a silver investor. Don’t worry, though – it’s not a complicated concept. It simply comes down to the fact that silver, as a commodity rather than an ordinary consumer item, has a price that floats on the world markets instead of being fixed by the seller. It’s also not the actual price you’ll buy or sell silver at, but it’s close enough that it’s the most important thing you have to consider before making a deal.
The most important factor affecting the spot price of silver is the aggregate of the prices being charted on the three main markets – COMEX, NYMEX and the London Commodities Market. There’s also an element of prediction involved; the spot price takes into account how the markets expect the price to move.
Actual movements can be caused by many factors ranging from recent trading, political events, movement in the price of other commodities or the overall economic climate. If demand for silver has been high the price will go up; the same will happen if there’s news of difficulties in a silver-producing region. Recessions also tend to drive precious metal prices up because they’re seen as a safe haven in a falling market. Silver prices also usually track closely with the spot prices of other precious metals, especially gold. The spot price changes from hour to hour and the major metal dealers will usually track it as closely as they can. That’s why successful silver investment depends on staying up to date with the price and being ready to act quickly – a favorable trend you identified might not still be there next day.
Like almost everything in finance the silver spot price is driven by the law of supply and demand – as the price of silver rises the number of people willing to sell at the current price goes up, while the number willing to pay that price goes down. The result is the market usually heads for the point where the numbers of buyers and sellers are equal. This makes the price reasonably self-stabilizing; when the price rises too high the number of people willing to buy goes down, reducing demand, and the price falls back. If it goes too low the number of potential sellers falls, reducing supply, and the price edges up again. Understanding some basic economics will help you identify trends in the spot price and stay with them. Falling behind the trend can be expensive – many people buy silver when the price is rising sharply, reasoning that it should keep rising, only for it to peak and fall back.
It’s very rare that trades will take place right on the spot price. Investors and dealers tend to sell just below it and buy just above it, with the difference being where profits are made. There’s also a premium on the bullion itself – highest with coins, lowest with bars – that can become significant on smaller units. Overall, though, knowing how the spot price works is your most useful tool as a silver investor.