How the GBP/USD Exchange Rate Affects Silver Prices in Britain

If you follow the silver price from a UK perspective, you have probably noticed that the price in pounds does not always move in step with the international dollar price. The reason is the GBP/USD exchange rate, which acts as a constant filter between the global silver market and what British investors actually pay or receive. Our live silver price tracker displays prices in both GBP and USD so you can monitor both variables simultaneously.

Why Silver Is Priced in US Dollars

Silver, like virtually all internationally traded commodities, is priced and settled in US dollars. This convention dates back to the Bretton Woods agreement of 1944. The two primary benchmarks, the LBMA Silver Price and the COMEX futures price, are both denominated in dollars per troy ounce.

When a UK dealer quotes a silver price in pounds, they divide the international dollar price by the current GBP/USD exchange rate. For example, if silver trades at 30 US dollars and the pound is worth 1.25 dollars, the sterling price is 24 pounds. If the pound weakens to 1.20 while silver stays at 30 dollars, the sterling price rises to 25 pounds without any change in the global silver market.

A falling pound acts as a tailwind for sterling silver prices, while a strengthening pound acts as a headwind. British investors are simultaneously exposed to two markets: the global silver market and the foreign exchange market.

Currency Hedging: Managing the Exchange Rate Risk

The simplest way to hedge currency exposure is through a GBP-hedged exchange-traded product. Several silver ETCs on the London Stock Exchange offer hedged share classes using forward currency contracts to neutralise GBP/USD movements.

However, hedging comes with costs. The forward contracts must be rolled regularly, and when US interest rates exceed UK rates, this creates a drag of 1 to 3 per cent annually. For physical silver holders, currency hedging is not practically available. If you buy bars or coins, you are inherently unhedged.

The Brexit Effect and Sterling Volatility

The United Kingdom's departure from the EU created dramatic currency events. On the night of the 2016 referendum, the pound fell from approximately 1.50 to 1.33 against the dollar. For UK silver investors, this crash translated into an immediate increase in the sterling silver price, even though the dollar price barely moved.

In the years following, the pound traded between 1.20 and 1.40, meaning UK silver investors enjoyed higher sterling returns than American counterparts. The mini-budget crisis of September 2022 provided another stark illustration. When the pound briefly plunged below 1.08, the sterling silver price spiked dramatically while the dollar price remained stable.

Bank of England Policy and Its Influence

The Bank of England's monetary policy directly impacts the pound and therefore sterling silver prices. Rate rises tend to strengthen the pound, pushing sterling silver lower. Rate cuts and quantitative easing weaken the pound and push sterling silver higher.

The relationship is a double-edged sword. Loose monetary policy weakens the currency, raising the sterling price, but also supports the dollar silver price because silver is seen as an inflation hedge. During aggressive easing, UK investors can benefit from both a rising dollar silver price and a falling pound, creating a powerful double tailwind. This played out during the QE programmes of 2009 to 2012 and 2020 to 2021.

Conversely, during tightening cycles, a rising pound and falling dollar silver price can combine to create sharper declines in the UK price than international headlines suggest.

Practical Tips for UK Silver Investors

Given the importance of the exchange rate, here are practical steps to manage currency risk:

• Always check both the dollar silver price and the GBP/USD rate before buying or selling
• Build your position gradually through regular purchases to smooth out currency fluctuations
• Evaluate whether a hedged or unhedged ETF better suits your view on the pound
• Periods of UK political uncertainty tend to weaken the pound and inflate sterling silver prices, potentially better times to sell than buy
• Monitor Bank of England interest rate decisions as the primary driver of short-term pound movements

The currency dimension adds complexity to silver investing for UK buyers, but it also creates opportunities. Investors who understand the GBP/USD relationship can time their purchases and sales more effectively.