Why Understanding XAG/USD Matters
If you've ever thought about how silver is quoted in global markets, the answer is XAG/USD. This trading pair specifies the price of silver in terms of the US dollar, and it is one of the most liquid, or actively traded, precious metals pairs in the forex and CFD market.
Silver is more than just another shiny metal. It is a legitimate investment asset that has a two-sided purpose. On one side, it is an industrial workload used from electronics to solar panels. On the other side, it is a historical store of value that investors tend to buy during times of economic uncertainty. XAG/USD takes both sides of the equation into one quote, making it a useful trading tool for hedging, speculating, and diversification.
To put it differently, if you are a professional trader, when XAG/USD often moves in rallies together with XAU/USD (gold) and provides a rough measure of actions going on regarding inflation and the strength of the US dollar. In other words, when inflation fears spur or the dollar weakens, silver often will rally as well with gold (or often an amplified price movement).
For those who are new to this, here's an easier way to visualise it. Think of it like this: You have a silver coin. The US dollar got stronger, so the price of that coin in dollars usually goes down. The value of your silver hasn't changed; it's just that the dollar got stronger against the silver. Alternatively, if the dollar gets weaker, that silver coin is now worth more dollars. That's what XAG/USD is.
The period from 2020 until early 2021 is a fantastic case study. The dollar gave up its strength when the pandemic occurred, and the Federal Reserve flooded the world with liquidity. What happened to silver? The price went from about $12 per ounce in March 2020 to nearly $30 per ounce by August 2020. That's a gain of 150% in a five-month period. Traders who understood the basic principles of XAG/USD and took positions before the price move were able to take a profit from this situation.
Remember, silver is not just a commodity that trades off of supply and demand curves. It is a component of the global monetary system we live in. The actions of central bankers, geopolitical events, innovations in industry, and inflation expectations all start to leave their fingerprints on the chart of XAG/USD. If you can understand this pair, then you can have a reasonable understanding of what the world's economy is doing at any given time.
The Basics of XAG/USD: What Does It Really Mean?
Let's dissect the code. XAG is an ISO currency code for silver (its Latin name is "argentum"), whereas USD stands for US dollars. XAG/USD indicates how much 1 troy ounce of silver costs in US dollars.
If you see that XAG/USD = 24.50 on the trading screen, this indicates that 1 ounce of silver costs $24.50, quite simple. However, when trading, there's more to it!
In traditional commodity markets, silver commonly trades in standard lots. A standard lot is 5,000 troy ounces, which is an enormous amount of silver, which is why retail traders often trade through CFDs (Contracts For Difference) that allow for much smaller position sizes, for example, micro-lots, or even fractional amounts of silver with CFDs that make it available without the use of a warehouse space and capital.
Moreover, it’s quoted in line with forex conventions. Therefore, you will see a bid price (the price buyers will pay) and an ask price (the price sellers want for the silver). The difference is called spread, which is your trading cost. An XAG/USD spread might be typical somewhere in the range of 3, 4, or 5 cents in normal market conditions.
Here's an example of how profit works in practice. Suppose, for example, you're a professional trader and buy XAG/USD at 24.50. The price moves up to 25.00, and you close your position. You have made $0.50 per ounce. If you traded one standard lot (5,000 ounces), you made $2,500. Of course, if the price moved against you at the same price, you'd be looking at a $2,500 loss.
For real beginners, you can think of it this way. Yesterday, you purchased a silver bar for $25. Today, someone offers you $26 for it. You sell and put the $1 difference in your pocket. Simple enough. That's profit. XAG/USD trading works under the same principles, just with much larger quantities and the option to employ leverage to increase your position.
One important note: silver trades in troy ounces, not standard ounces (also referred to as long ounces). A troy ounce is equal to about 31.1 grams, while a standard ounce is 28.35 grams. This is important when comparing prices across lenses, or if you wish to calculate how much physical silver is represented by that contract.
One of the great advantages of XAG/USD, as a trading instrument, is its versatility. You may take a long position (bet on prices going higher) if you think the silver price will strengthen against the dollar, or a short position (bet on prices going lower) if you expect the price to fall. You don't have to ever own physical silver to benefit from the price movements. You are only speculating on the price direction, and this is the appeal of CFD trading for traders in modern markets.
What Influences the Price of Silver (XAG/USD)?
Silver does not move in a vacuum; it is pulled in multiple directions by multiple forces and occasionally at the same time. Understanding these drivers is important if you plan to have any level of success trading XAG/USD.
US Dollar Strength: The Driver
Because silver is dollar-denominated, the correlation of XAG/USD to the dollar is inverse. So when the US Dollar Index (DXY) goes up, silver goes down, and when the DXY goes down, silver goes up. Why? A stronger dollar makes silver more expensive for international buyers, which ultimately decreases demand for silver. A weaker dollar makes silver cheaper in other currencies, which ultimately increases the global demand.
Inflation and Interest Rates: The Economic Weather
Silver does well in inflationary environments. When customer prices are rising and purchasing power erodes away, investors want to find real assets to store their value. Silver is a real asset, tangible, scarce, and given it has thousands of years of monetary history behind it.
Interest rates are the counterbalance to this relationship. When the Federal Reserve actively raises rates, the opportunity cost of holding a non-yielding asset such as silver increases. Why hold silver when I can hold borrowed money (a “risk-free” investment) in Treasury bonds that are earning 5% per year? This was very clear during the tightening cycle in 2022. As rates rose from near-zero to over 5%, the price of silver measured in XAG/USD fell from approximately $27 in March 2022 to under $19 by September 2022.
Industrial Demand: Silver’s Day Job
Unlike gold, which is mainly a monetary metal, silver has huge industrial uses. Approximately 50% of annual demand for silver is from industrial uses: electronics, solar panels, medical equipment, and electric vehicles. With the transition to green energy, silver demand has increased just from solar panel manufacturing. Each solar panel contains about 20 grams of silver.
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