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Increasing Silver Prices across the globe in past 10 years

Executive Summary

Silver has been known to the mankind since ancient times. The human beings from the
ancient ages have learnt to separate silver from lead. Traditional uses of silver included
jewelry, highly valued tableware, utensils and currency coins. The prices of silver were
high in the ancient times, so procuring these items was possible only for the rich. But
gradually the prices fell and the normal individuals could afford the same. But the
fluctuation of the prices has not remained unaffected.

Value of Silver Prices

40 35
Price (US Dollars per Troy

35
30
25 21.34
Ounces)

20 15.21 49.45 
15
10
4.15
5
0
1980 2001 2006 2008
Year

Figure 1. Prices of Silver from 1980 to 2008

In the earlier days, the prices of silver were relatively too high. The data of the 15th
Century tells us that the price has crossed $800 per ounce figure which was based on the
1998 dollars. But the discovery of the new reserves during the gradual development has
led to discover more silver reserves. But till today today, the prices are sky-rocketing
which can be also seen from the graph above.

The aim of this research is to study the fluctuations in the silver prices and find out the
basic reason behind its fluctuations.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 1


Increasing Silver Prices across the globe in past 10 years

Objective

Silver prices have kept on fluctuating since 15th century. Earlier it was due to the limited
reserves of the precious metal but since the reserves have been explored, the limited
source of silver does not seem to be a valid reason for the increase in the silver prices.

The reasons for the increase in the silver prices since past 10 years are as follows:

• Increasing consumption of silver


• Money Supply in the Market by Federal Reserve.

The objective of undertaking this research is to find out which of the two independent
variables affects the increase in the prices of silver. It also includes the projection of
silver prices for the next five years on the similar grounds.

Assumption: We are taking only Federal Reserve Bank (Central Bank of the United
States of America) into consideration for the money supply in the market as it contributes
30% of the world’s total growth.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 2


Increasing Silver Prices across the globe in past 10 years

Literature Review: The following literature has been reviewed before undertaking the
research on the silver price fluctuations.

Austrian School of Economics:

Austrian School of Economics follows Neoclassical School of thought. This school of


thought says that the increase in money supply in the market is the major reason for the
increase in the inflation.

Free Market Economy: Free market economy states that for the healthy state of the
economy, there should be minimum amount of government and Central Bank
intervention.

They used empirical data for their research and concluded that the prices are affected by
the increase in the money supply, the most. This will create a bubble in some parts of the
economy which would eventually burst out. This bursting creates a scenario of recession
in the economy. The work of recession is to take out the excess froth from the economy
and increase in money supply in such kind of scenario would deteriorate the economy
more over the longer term.

They basically argue that increase in money supply will not increase the consumption of
the resources and merely create inflation.

Had the money supply in the market not been increased, the demand would remain the
same and the prices would not increase.

Dot com bubble

This refers to the dot-com bubble in 2001 which was primarily fed by the explosive
growth and the popularity of the internet web sites. This was also associated with the
various companies providing and using such services in the technological industry.
Certain companies went under the bubble burst while many other companies learned
good lessons about how to run a company. Good number of investors lost thousands of
rupees in this bubble which eventually led to a small economic recession that was
witnessed by the world in the early 2000s.

The year 1995 was significant in which there was tremendous growth in the number of
internet users across the globe. As the number of users increased, the internet companies
began to take advantage of the same. This explosive growth of the companies was just a
fad. Companies were not able to sustain this fad and therefore declared bankruptcy.

Subprime Crisis:

The late 2000s financial crisis had first shown its indicator through the US subprime
mortgage crisis. The subprime crisis caused a big loss to the banks and had also affected
the various other industries. Subprime mortgage loans are similar to the house loans or

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 3


Increasing Silver Prices across the globe in past 10 years

the junk loans. But these types of loans are very risky. But the profit margin associated is
very high. A lot of investors or lenders got involved into it and tried to make quick
money from this business. These types of loans were basically aimed at individuals who
had the inability to repay the loan and don’t have stable income.

To illustrate how the subprime crisis initiated consider the following example:

A person working in an IT firm earns Rs. 40 k per month and has no other source of
income. When he approaches the bank for loans, the EMI on the loan would be Rs. 20 k –
Rs. 30 k. If the person loses the job, there is no possibility of him t repay the loan and
hence will surrender the house to the bank.

As a result of this crisis, many banks declared themselves as bankrupt and Lehman
Brothers was one of them.

 Role of Federal Reserve in the Subprime Crisis:

• The Federal Bank lowered the Federal funds rate from 5.25% to 2% and in
December 2008 it further lowered to a target range of 0-0.25%. The discount
rate was reduced from 5.75% to 2.25%.
• Open market operations were encouraged to ensure that the member banks
remained liquid.
• It had created a variety of lending facilities to enable the Fed to lend directly
to banks and non-bank institutions, against specific types of collateral of
varying credit quality.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 4


Increasing Silver Prices across the globe in past 10 years

Approach to the Problem

Following data represents the consumption/demand of the silver across the globe, the
money supply by the Federal Reserve into the market and the Prices of the silver year
after year.

Usage/Consumption 
Money Supply ( in bn 
( millions of ounces)
Year Prices ( in $) $)
     
2000 4.9506 919.1 600
2001 4.3702 870.9 720
2002 4.5995 853.1 790
2003 4.8758 869.3 810
2004 6.6711 868.2 860
2005 7.3164 916.3 905
2006 11.5452 907.2 910
2007 13.3836 888.7 970
2008 14.9891 888 1000
2009 14.6733 889 2500
2010 20.1928 900 3100
2011 31.2847 910 3400
Table 1. Prices of Silver from 2000 to 2011 with the demand and money supply in market

The combinations used for the analysis are as follows:

Sr. No Dependent Variable Independent Variable Constant


1 Silver Prices Consumption of the silver has Money Supply in the
increased year after year market by the Federal
Reserve
2 Silver Prices Money supply in the market has Consumption has
increased year after year unchanged
3 Silver Prices Both as the variable factors that None
is money supply and the
consumption.
Table 2. Base for analysis

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 5


Increasing Silver Prices across the globe in past 10 years

Based on the above data, regression analysis is represented as follows according to the
sequence shown above:

1. Consumption has increased year after year.

Regression Statistics
Multiple R 0.42501318
R Square 0.180636203
Adjusted R Square 0.098699823
Standard Error 7.674250389
Observations 12
Table 3. Regression Summary

ANOVA Test

Significance
df SS MS F F
Regression 1 129.8374431 129.8374431 2.204590972 0.168425
Residual 10 588.9411904 58.89411904    
Total 11 718.7786335      
Table 4. ANOVA Test

Standard Lower Upper


Coefficients Error t Stat P-value 95% 95% Lower 95% Upper 95
- -
Intercept -132.2599 96.89509246 -1.36498 0.20218 348.15561 83.635826 348.155612 83.63582

Variable  - -
1 0.1616108 0.108844469 1.484787 0.168425 0.0809098 0.4041314 0.08090979 0.404131
Table 4.1. ANOVA Test

Residual Output
Observatio Predicted Standard Money supply
n Y Residuals Residuals Constant
1 16.276593 -11.32599278 -1.547877752 616.2765928
2 8.4869522 -4.116752245 -0.562619925 728.4869522
3 5.61028 -1.010780016 -0.138139228 795.61028
4 8.228375 -3.352574966 -0.458182899 818.228375
5 8.0506031 -1.379503087 -0.188531123 868.0506031
6 15.824083 -8.507682537 -1.162710658 920.8240825
7 14.353424 -2.808224263 -0.383788684 924.3534243
8 11.363624 2.019975526 0.276061908 981.3636245
9 11.250497 3.738603085 0.510939805 1011.250497
10 11.412108 3.261192286 0.445693996 2511.412108
11 13.189827 7.002973493 0.957068142 3113.189827
12 14.805935 16.4787655 2.252086417 3414.805935
Table 5. Residual Output Summary

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 6


Increasing Silver Prices across the globe in past 10 years

Figure 2. Regression Residual Plot of Consumption of Silver and Prices of Silver

Figure 3. Regression Line Plot of Consumption of Silver and Prices of Silver

There is 42% coefficient of determination and 18% coefficient of co-relation from the
above regression

2. Money supply in the market has increased year after year

Regression Statistics
Multiple R 0.881360528
R Square 0.77679638
Adjusted R Square 0.754476019
Standard Error 4.005421234
Observations 12
Table 6. Regression Summary

ANOVA Test
df SS MS F Significance F
Regression 1 558.3446409 558.3446409 34.8021 0.000151192
Residual 10 160.4339926 16.04339926    
Total 11 718.7786335      
Table 7. ANOVA Test

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 7


Increasing Silver Prices across the globe in past 10 years

Standard Lower Lower


Coefficients Error t Stat P-value 95% Upper 95% 95% Upper 95%
-
Intercept 1.75390159 2.026376652 0.865536 0.40703 -2.76115 6.26895012 2.7611469 6.26895012

Variable 
1 0.00711171 0.001205511 5.899334 0.00015 0.004426 0.00979776 0.0044257 0.00979776
Table 7.1. ANOVA Test

Residual Output
Standard Demand 
Observation Predicted Y Residuals Residuals Constant
-
1 6.020927763 1.070327763 -0.280262465 6.020927763
-
2 6.874332997 2.504132997 -0.655700535 6.874332997
-
3 7.372152717 2.772652717 -0.726011706 7.372152717
-
4 7.514386923 2.638586923 -0.690906936 7.514386923
-
5 7.869972437 1.198872437 -0.313921545 7.869972437
6 8.1899994 -0.8735994 -0.228749669 8.1899994
7 8.225557952 3.319642048 0.869239401 8.225557952
8 8.652260569 4.731339431 1.238888588 8.652260569
9 8.865611878 6.123488122 1.603419004 #VALUE!
10 19.53317731 -4.85987731 -1.272545889 577.8778182
-
11 23.80020348 3.607403483 -0.944588964 184.2341961
12 25.93371657 5.35098343 1.401140714 744.7123501
Table 8. Residual Output Summary

Figure 4. Regression Residual Plot of Money Supply of Silver and Prices of Silver

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 8


Increasing Silver Prices across the globe in past 10 years

Figure 5. Regression Line Plot of Money Supply of Silver and Prices of Silver

There is 88% coefficient of determination and 77% coefficient of co-relation from the
above regression

3. Considering consumption and the money supply as variable factors

Regression Statistics
Multiple R 0.896112913
R Square 0.803018353
Adjusted R Square 0.759244654
Standard Error 3.966333301
Observations 12
Table 9. Regression Summary

ANOVA Test

Significance
df SS MS F F
Regression 2 577.1924 288.5962 18.34477 0.000668215
Residual 9 141.5862 15.7318    
Total 11 718.7786      
Table 10. ANOVA Test

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95% Lower 95% Upper 95%
- - -
Intercept 55.25192417 52.119506 1.0601 0.31672 173.154438 62.65059 -173.15444 62.6505894
X  -
Variable 1 0.064707362 0.059117034 1.0946 0.30213 0.06902466 0.198439 -0.0690247 0.19843938

Variable 2 0.006689629 0.001254484 5.3326 0.00047 0.00385179 0.009527 0.00385179 0.00952747
Table 10.1. Regression Summary

Residual Output

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 9


Increasing Silver Prices across the globe in past 10 years

Observatio Standard
n Predicted Y Residuals Residuals
1 8.234389473 -3.283789473 -0.915295206
2 5.91825016 -1.54805016 -0.431490174
3 5.234733175 -0.635233175 -0.177059426
4 6.416785019 -1.540985019 -0.429520897
5 6.680088387 -0.008988387 -0.002505346
6 10.0935458 -2.777145799 -0.774077711
7 9.538156955 2.007043045 0.559425899
8 8.742448524 4.641151476 1.293634605
9 8.89784225 6.09125775 1.697824743
10 18.99699357 -4.323693575 -1.205149123
11 23.72255214 -3.529752137 -0.983852722
12 26.37651455 4.908185454 1.368065357
Table 11. Residual Output Summary

Figure 6. Regression Residual Plot of Consumption of Silver and Prices of Silver

Figure 7. Regression Line Plot of Consumption of Silver and Prices of Silver

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 10


Increasing Silver Prices across the globe in past 10 years

Figure 8. Regression Residual Plot of Money Supply of Silver and Prices of Silver

Figure 9. Regression Line Plot of Money Supply of Silver and Prices of Silver

There is 89% coefficient of determination and 80% coefficient of co-relation from the
above regression

Analysis: Keeping the money supply constant, we see that the coefficient of co-relation
is quite low compared to keeping the consumption constant. When we take both the
parameters are variables, we see that there is high co-relation between the money supply
and the prices

Hence we conclude that prices depend more on money supply and les on consumption.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 11


Increasing Silver Prices across the globe in past 10 years

Research Methodology

The research methodology adopted is exploratory; developing insights into the prices of
silver over the next five years from the details of the past.

The data collection method used is secondary method of collection.

Sources for the secondary data collection are mentioned below:

Internet
News Channel – ET Now, CNBC TV 18, NDTV Profit
Newspaper – Economic Times, DNA, Business Standard
Journal – Forbes India

There is no questionnaire since the research is purely based on the secondary data.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 12


Increasing Silver Prices across the globe in past 10 years

Conclusions

Hence we conclude that prices depend more on money supply and less on consumption.

Today, silver prices are ruling close to$ 31which is 40% away from its all time high of $
50. If the co-relation between prices and money supply holds the same as described
above, silver prices will hit $ 50 in the next three years.

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 13


Increasing Silver Prices across the globe in past 10 years

Recommendations

We would like to recommend that the money supply should be regularly kept in control
rather than pumping more money into the system

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 14


Increasing Silver Prices across the globe in past 10 years

References

Websites Visited:

http://en.wikipedia.org/wiki/Austrian_School
http://austrianeconomics.wikia.com/wiki/Milton_Friedman
http://en.wikipedia.org/wiki/Silver
http://silverprice.org/buy-silver/2008/01/buy-silver.html
www.moneycontrol.com
www.kitco.com

Journals and Books Referred

Forbes India
Business Research Methodology, C R Kothari

Videos Referred

John Taylor's Reason Versus Paul Krugman's

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Increasing Silver Prices across the globe in past 10 years

Submitted to Prof. Jinal Parikh, Amrut Mody School of Management, Ahmedabad 16