Silver prices have been volatile ever since the debt ceiling debate started, and investors have mixed feelings about the metal. Should they move towards silver as a safe haven investment or move away from it as the U.S. economy narrowly avoids ruin?
How the U.S. Economy Affects Silver
Silver is much like gold in that it seems to do best when the dollar is at its worst. It’s why many investors choose these precious metals when times are rough in the United States. The only problem is when times are uncertain, like now, it’s difficult to determine where these precious metals will go.
The government shutdown has affected silver prices significantly. It's been ongoing since September 30, 2013, when the Senate and House could not come to an agreement on the country's budget deficit. Now the debt ceiling is fast approaching, and without a decision by October 17th, the U.S. could default on its bills, which could send the economy into a horrific frenzy.
Silver prices responded in an unusual fashion. At the start of the shutdown, silver futures went down by 2.65% to $21.148. Many were unsettled by this drop as the U.S. entered a risky situation, but the following day, the trend returned to normal as futures rose 2.75% to 21.73. And it rose every day following that in which there was no sign of an agreement.
On October 8th, President Barack Obama publicly informed John Boehner, Republican Speaker of the House of Representatives, that he was ready to end the shutdown – on his terms. He said, according to Zacks:
“So my suggestion to the Speaker has been and will continue to be: 'Let's stop the excuses, let's take a vote in the House, and let's end this shutdown right now'...There are enough reasonable Democrats and Republicans in the house who are willing to vote 'yes' on the budget that the Senate had already passed.”
Due to the ray of hope that the shutdown would soon be over, silver prices again responded as they should – they dropped 2.35% to 21.855 on October 9th. They've closed down ever since that announcement, though during the day prices have been moving up. Why?
We’ve come to the 15th day of the government shutdown, and there is no resolution as of yet. Confidence has dropped in the U.S. avoiding default, and now everyone is scared again as default day is two days away.
Silver Prices and the Debt Ceiling
If the U.S. defaults, expect silver prices to soar, as everyone tries to protect their investments with the commodity. But let’s say the government raises the debt ceiling and the economy is saved from catastrophe. Does this mean you should avoid silver?
The government shutdown is only one factor affecting the economy. The Federal Reserve has a hand on the economy too – a big hand. The Fed recently declared the economy wasn’t strong enough to sustain itself without stimulus – or even with reduced stimulus – so it’s continuing to print money to fuel the economy. This devalues the dollar, and when the dollar is low, silver moves up.
As you can see, while silver has declined and risen with the tides of the debt ceiling, the sustainability of silver will continue long after October 17th. Silver is used in many industries, and that means demand will continue to affect prices.
Since silver is used in many sectors, so demand is a big driver of its price. It’s used in industry, jewelry, silverware, photography, and much more. Its highest demand comes from the industrial sector (as much as 44%), with investments (30%) and jewelry and silverware (22%) following behind.
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Making a Move with Silver
If you’ve already invested in silver, watch what the government is going to do. Discussions appear to be getting closer to avoiding default, but it’s not for certain yet, and the government is still closed for business.
Even if the government reopens, pay attention to what happens as the economy starts recovering from the two week shutdown. Don't get scared if silver prices drop; if you wait long enough, you’ll likely see them start to climb, as we all see the effects of the Fed on the dollar emerge.
If you haven’t invested in silver yet, you may want to start thinking about it. Silver will drop if the government avoids default, and that may be the best time to get in at a good price, allowing you to gain all the more from the rises that come later on.
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