The Price of Silver in 2013 Fell 36%. Here's Why.

In the precious-metals arena, gold gets most of the attention. But at least in the recent past, silver has tended to be more volatile than gold, and so those who are bullish on the prospects for precious metals generally have often turned to the silver market to try to maximize their returns. Unfortunately, that tendency for higher volatility worked against silver investors this year, as the price of silver in 2013 crashed almost $11 per ounce, falling 36% and taking spot prices from above $30 per ounce to below the $20 level. Let's look at what moved silver so much and what conclusions you can draw about the precious metal's potential for positive returns in 2014.


Source: Creative Commons/Armin Kubelbeck.

Why did the price of silver in 2013 fall so much?
Unlike gold, which until 2013 had seen 12 consecutive winning years, silver had already suffered a major bear market before 2013 ever began. In early 2011, silver prices soared to nearly $50 per ounce,

Yet those gains proved short-lived, and by the end of 2011, the price of silver had dropped below where it had closed the previous year. 2012 produced a rebound of sorts, with many analysts pointing to the beginning of the Federal Reserve's third round of quantitative easing as potentially pushing silver back up to $50 and gold above $2,000. Yet silver prices never came close to regaining their former highs, and by the beginning of this year, opinions were varied about whether the price of silver in 2013 would climb or not.

New York Silver Price Chart

Silver Price data by YCharts.

Silver started out the year on a stronger note than gold, outperforming the yellow metal as some investors believed that the cheaper precious metal was poised to catch up with gold's stronger performance since their 2011 highs. But in the end, silver's historical ties to gold prices reasserted themselves, and when gold prices plunged $200 per ounce in two days in April, silver fell even more on a percentage basis, plummeting $4 per ounce to go below $25 per ounce for the first time since 2010.

Silver does have industrial uses that gold doesn't, creating the potential for disparities in returns depending on economic conditions. But with so much of the bull market in both gold and silver having been dependent on the Federal Reserve's accommodative monetary policies, the sudden fear that the Fed would taper its extensive bond-buying under QE3 level.

The impact of weak silver
As investors saw with gold, the drop in the price of silver during 2013 led to a cascading negative effect throughout the industry. Silver miners found their margins crushed, leading to even more extensive drops for major producers Pan American Silver (NASDAQ: PAAS  ) and Hecla Mining (NYSE: HL  ) . Dividends that had been based on higher silver prices gave way to dividend cuts as cash flow disappeared and miners chose instead to preserve cash for operational use. Falling prices made silver production less attractive, hitting silver-streaming giant Silver Wheaton (NYSE: SLW  ) hard as some of its anticipated silver production evaporated.

Interestingly, though, silver bullion investors haven't lost interest in the precious metal. The iShares Silver Trust (NYSEMKT: SLV  ) had been a huge popular investing vehicle for silver, and even with the price drop, the trust still has roughly the same 10,000-ton amount of bullion in its vaults, backing up shares of the investment vehicle. That's in stark contrast to gold ETFs, which saw dramatic outflows during the year. Nevertheless, the value of investors' silver-ETF shares has dropped by a corresponding amount to the spot price, leaving investors suffering big losses in what was an incredibly strong year for stocks outside the mining industry.

What's ahead for silver?
Silver prices will face some of the same challenges in 2014 that they did this year, with the Fed's tapering on bond buying potentially putting more upward pressure on interest rates. Yet given its relatively low price, silver might well hold up better than gold if investors see the white metal as a cheaper way to play a potential bounce in precious metals. Nevertheless, silver investors will need to watch miners like Hecla and Pan American to see what decisions they make with their silver production, as well as keeping an eye on Silver Wheaton to see if it continues making deals in hopes of a rebound in the price of silver from 2013 and its horrible decline.

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Read/Post Comments (6) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2013, at 6:23 PM, CoyoteMoney wrote:

    People keep losing because they continue to confuse gold and silver with money.

  • Report this Comment On December 22, 2013, at 12:02 AM, SkepikI wrote:

    People keep losing money on silver because they continue to confuse the supply and production of silver with gold much as Dan has done here. Financial writers dabbling in silver production issues and prices are much like financial writers dabbling in petroleum production. just because you are a banker or cpa does not mean you can operate a drill rig.....or understand what it means.

  • Report this Comment On December 22, 2013, at 3:02 AM, newday5145 wrote:

    Mr. C.

    Why was there no mention of the manipulation of

    the precious metals market, "paper" vs physical?

    Does JPM/Chase et al, do the same with financial reporting?

  • Report this Comment On December 22, 2013, at 6:41 AM, BurtsDog wrote:

    It is possible that the wicked pullback we are seeing in gold and silver is similar to the wicked pullback that happened after the tremendous rallies of 1974-1975. Guess what happened after that? There was a period of consolidation and then... the mother of all rallies into 1980. So, you never know. I will bookmark this article and refer back to it in 2-5 years. We should know by then.

  • Report this Comment On December 23, 2013, at 10:21 AM, rhealth wrote:

    Gold and Silver have been kept artificially low for a long time now by entities seeking to corner the market. Everyone knows about it. If you don't, there are a dozen articles about it on SA alone.

  • Report this Comment On January 02, 2014, at 11:35 AM, MiserblOF wrote:

    That "mother of all rallies into 1980" ended up with that "mother of all sidways" for the next 15-20 years. People need to realize that markets are not rational, nor are they predictable. If you are 30 years old, silver might be a good buy right now, and if you're old, good for gifts to young 'uns. For old farts like myself, there is a good possibility that silver will wallow in the mire for the rest of our lifetimes, and it just doesn't make a lot of sense.

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