While the silver price gained over 10 percent in the first quarter of the year, Q2 was a different story. The white metal dropped about 13 percent in the second quarter, andwas below $16 per ounce as of Thursday (July 13).

In a note, Capital Economics economistSimona Gambarini explains that precious metal has been trending downwardsince mid-April, noting that speculators appear to beturning increasingly negative on both gold and silver. The number of short contracts in the silver futures market has increased by over 150 percent since the start of the year, the highest level on record.

Read on for a more in-depth look at themain factors that impacted the silver market in the secondquarter of 2017. This silver price update also includes an overview of what investors should watch out for heading into Q3.

Silver price update: Demand

Part of the reason silver fell in Q2 is that it is considered an insurance policy in times of geopolitical uncertainty. Speaking to the Investing News Network via phone, Johann Wiebe of Thomson Reuters GFMS explained that in 2017 more modest governments have been formed in Europe. That’s in contrast to 2016, when when there was much concern about the rise of Euro-skepticism in countries like France, the Netherlands and Germany.

Wiebe also said the silver price has been affected by rising interest rates in the US. He noted thateverybody is eyeing the US Federal Reserve, which raised interest rates in March and Juneof this year. Wiebe said he expects a pause, at least for this year, in the rate hiking cycle.

Capital Economics sees the Fed’slast rate hike occuringin Q1 2019. Gambarini said the prospect of higher interest rates is likely to weigh on investment demand, which is expected to fall by 3 percent in 2017 as a result of the tighter US monetary policy environment.

Indeed, she notes that silver coin sales in the US and Australia, two of the largest markets, were 49 percent lower in the first half of 2017 compared to the same period in 2016. Similarly, physically backed silver ETF holdings haveincreased by 24 million ounces so far this year – that’s about half the amountadded over the same period in 2016.

In contrast, industrial demand for silver is on the rise.Wiebe said the solar sector continues to be the bright star of the silver industry, noting that the metal is increasingly being usedin solar panels to help the world transition from fossil fuels to green energy generation. Demandfor silver in industrial applications is expected to grow by about 1 percent year-over-year.

Silver price update: Supply

Silver is primarily mined as a by-productat gold, zinc and copper operations.Oversupply has been an issue in the silver market for the past 10 years, Gambarini explains, but notes that production cuts have begun to take their toll on mine supply.

Global silver mine production fell by 1 percent in 2016, with output from top producers Mexico and Peru sinking4 and 3 percent year-on-year from January to April, respectively. The fall in production was due to flooding in Peru, workers striking in Mexico and exhaustion of reserves.