Silver Investment Strategies in a Fluctuating Interest Rate Environment

While silver is a mined metal and therefore a commodity driven by the balance between supply and demand, it is also considered a financial asset and is therefore hugely impacted by the state of the broader macroeconomic environment it sits within.

An investor has to consider the impact rising interest rates, a scenario we have seen across the globe over the last year or so, will have on the silver price and also look ahead to a time when interest rates are falling.

Exploring the Relationship Between Interest Rates and Silver Prices

In simple terms, when interest rates go up, the price of silver falls. This is because physical silver doesn’t deliver a yield or pay a dividend so when rates rise, other interest-bearing assets become more attractive in its place.

This dynamic was clearly visible in 2022 when silver endured a multi-month slump once the Federal Reserve started implementing a series of large interest rate hikes in April of that year. This pressure from the Fed hikes prompted the silver price to collapse from its peak above $26 an ounce in March down to below $18 an ounce at its nadir in late August/early September. 

While the price has recovered some of those losses since then, it still remains below the 2022 high under the weight of interest rates – at around 5%. In contrast, silver’s high of the last 10 years was achieved in August 2020 when the Fed’s interest rate was close to zero as the US central bank was tackling the impact of an economy ravaged by the coronavirus pandemic.

These price fluctuations have taken place despite the fundamental case for silver remaining as strong as ever, with the metal having been in a supply deficit since 2019, according to the Silver Institute. This highlights how macroeconomic factors can override the underlying fundamentals for silver and illustrate why investors must treat the metal more like a financial asset rather than a commodity.

Investing in Silver Mining Stocks: Potential Benefits and Risks

With silver in such heavy industrial demand with the metal a key component of the energy transition, thanks to its use within solar panels and batteries for electric vehicles, investing in the miners producing the metal is another way for an investor to gain exposure.

In contrast to physical silver holdings, miners often pay dividends to shareholders while the share price is linked to the value of the commodities they mine. With Mexico being the source of the most silver in the world, it is no surprise to see the largest silver producers based there, including Industrias Penoles and Fresnillo.

One factor to consider before investing in silver mining stocks is the added geopolitical risk that can negatively impact a company’s share price. Russian-based Polymetal, the world’s second-largest silver producer, saw its value plummet after the country’s invasion of Ukraine last year, with the share price kept subdued ever since.

Pitfalls to Watch Out for When Investing in Silver: Avoiding Common Mistakes

Stock market investing should always be with a long-term view. As the adage goes, time in the market is better than timing the market. An investor should therefore consider what their ultimate goal is with their investment portfolio and whether silver has a role to play. 

As a metal in long-term supply deficit, its proven role as a diversifier of a portfolio along with its safe-haven appeal and lack of counterparty risk, there are plenty of reasons why people choose to invest in silver.

Once the decision has been made to invest in silver, if it was the right decision a couple of months ago, based on a long-term view, then it remains the right decision still now, even if the price of silver may have fallen in that timeframe. While short-term investing, with regular entries and exits from a position, can prove profitable, it also comes with significantly increased transaction costs that can wipe out the benefits.

Decide on the strategy, then keep faith with it over the long-term, safe in the defensive role silver will be playing in that portfolio.

Staying Informed: Monitoring Market Conditions That Impact Silver Prices

While a buy-and-hold strategy is typically the most effective for a retail investor, it remains important to keep an eye on markets and check in to see that strategy remains the best for the individual.

Keeping abreast of long-term market trends, with the Silver Institute an invaluable resource in this regard, as well as what actions the Federal Reserve and other central banks around the world are taking, are essential starting points for any informed investor. 

While any price changes along the way shouldn’t necessarily be cause for a complete change in strategy, price dips may present opportunities to top up holdings while price gains may offer the chance for some silver to be sold to fund investments in other parts of a portfolio to ensure it remains balanced and not overly skewed to any single asset class.

Maximizing Your Returns in a Fluctuating Interest Rate Environment

The high-interest rate environment is undoubtedly challenging both for silver investors as well as the broader equities sector. However, signs that the Federal Reserve is now coming close to the end of its series of hikes have given the price of silver a real boost recently, with the price climbing up towards $25 an ounce.

The prospect of the peak of the rate hike cycle allied to an underlying fundamental case that has remained very strong throughout the recent difficult macroeconomic environment points to a silver price with plenty of potential to climb significantly higher and ultimately reach the $30 an ounce threshold touched only a handful of times in the metal’s long trading history.

One way for an investor to get the best of both worlds is to buy Kinesis silver KAG. This silver-backed asset offers the security of a physically-backed digital currency and combines it with a monthly yield that is paid to users for holding and spending the precious metal via their card.

KAG successfully removes the single biggest obstacle to silver ownership, the physical metal’s lack of yield, and offers a product that has the potential to deliver a return irrespective of the fluctuations of interest rates. A winning combination in every macroeconomic environment.

Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News. 

As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.