Price of Silver in 2014: What's Behind This Year's Double-Digit Percentage Drop?

Source: Creative Commons/Armin Kubelbeck.

When it comes to precious metals, gold shines above the rest. But even though it's far cheaper than its yellow-metal cousin, silver tends to appeal more to many traders, because silver prices tend to move more violently than gold prices during key times in the precious-metals markets. After 2013's 36% plunge in silver prices, many investors had hoped that silver and other precious metals would stage a comeback. Yet with declines of as much as 18% as of Dec. 9, silver looks unlikely to finish 2014 on a positive note. Let's take a closer look at exactly what happened with silver in 2014 and what made it so resistant to any lasting rebound in precious metals.

New York Silver Price data by YCharts.

Why did the price of silver in 2014 fall again? It's hard to believe that as recently as 2011, the per-ounce price of silver had soared nearly to the $50 mark, as speculators looked at the soaring demand for precious metals as an alternative to financial assets. Yet as it became apparent that the upside in the metals market was limited, investors sold off in mass, creating plunging prices for both silver and gold.

Coming into 2014, those who follow the silver market saw some potential signs of life. Traditionally, both silver and gold have been sensitive to rising risk levels in the financial markets, and participants in the precious-metals markets saw the increasing tensions between Russia and Ukraine early in the year as bullish for metals -- especially given the extent of Russia's mineral wealth. Within the first few months of the year, silver saw 10% gains, and silver mining stocks enjoyed even larger gains as a result of the return of optimism for the hard-hit mining industry.

London fix prices. Data source: London Bullion Market Association.

Yet just as investors saw with gold, interest in silver waned as the stock market continued to soar along with the U.S. economy. As the Federal Reserve's quantitative easing program ended, silver investors failed to see the cataclysmic impact on the value of fiat currencies that many of them had anticipated, and an almost complete lack of inflationary pressure led to the rise in financial asset prices creating huge opportunity costs for those who had looked to silver as a store of value instead.

Will silver bounce back?One concern silver investors need to consider is that the metal failed to respond to improving domestic economic conditions. Given the metal's usefulness as a conductor, silver plays a vital role in areas ranging from batteries to photovoltaic systems, but even as demand for solar panels has climbed in the U.S. recently, the positive impact on silver prices seemed minimal at best.

In addition, fallout elsewhere in the commodity sector could make investors more reluctant to jump into silver even at its current low prices. The plunge in crude oil prices over the past couple of months has reminded investors just how volatile commodities can be, and even when prices appear to be cheap, there's no guarantee they won't fall considerably further before the market bottoms out. Despite a few promising periods during the year when silver seemed to be positioning itself to end its run of poor performance, those optimistic times have been short-lived at best.

Source: Flickr user Sprott Money.

That said, investor interest in silver doesn't appear to have diminished entirely. The iShares Silver Trust , which holds physical silver bullion, continues to see between 10,000 and 11,000 tonnes of the metal in its coffers, equating to about $5.6 billion, even at today's currently depressed prices. Those who own shares of the trust will profit from rising silver prices, so that market behavior gives bullish investors hope that 2015 could improve for the silver market.

As next year approaches, silver prices desperately need to find a bottom and begin to rebound. With many silver-mining companies approaching the level at which what they can get from silver production is insufficient to meet their costs, any further price declines could finally lead to wide-scale production cuts. That might prove to be the single most important support to the silver market both in 2015 and beyond.

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