Since ancient times, the word “silver” has been used around the world to denote money. As a renowned monetary commodity like gold, silver has an intrinsic value in and of itself, making it ideal as a currency and store of value. With a limited and diminishing supply, silver has consistently sustained its value as currency for over 4,000 years. It is why large investment funds, and other investors are increasingly allocating some of their investments to silver.
For a private investor conscious about the security and performance of your investment, the following questions should be foremost in your mind:
- Why should I buy silver for my portfolio?
- What makes silver such a good investment?
- Why should I buy silver now?
There are numerous reasons why silver, especially at current prices, is not only a great bargain but a solid investment choice.
Why Should I Buy Silver for My Portfolio?
When you buy silver, you acquire a precious, finite and rare commodity that has been revered for its value throughout the ages. Silver has been passed on from heir to heir as a prized possession. Portable, tangible and valuable, silver coins or bars can be bought, taken delivery of, or stored in high-security vaults.
So, what makes buying silver a good investment?
Silver is a Valuable Asset: The two precious metals, gold, and silver have always been dependable investments with intrinsic value that has never waned over the centuries. Over the last 15 years, the price of silver has more than doubled from a low of $7 per ounce in 2005 to its current level of $17 per ounce. As a prized asset, silver has proven time and again that it can deliver significant value for investors. It has risen by over 8% per annum in most currencies over the last 15 years.
Silver is a Hedge: Silver has intrinsic value without the baggage of counterparty risk that is ever present in investments such as stocks, shares or bonds. Its value is also not derived from any other asset or anchored in blind faith like paper currencies.
Just like gold, silver tends to have a negative correlation with other assets, which means investors can be protected when bonds, shares or property lose value. Such an asset can act as a hedge by cushioning your portfolio from potentially massive losses in times of war, stagflation, terrorism, natural catastrophes, and currency crisis.
The price of silver rises significantly during times of economic uncertainty as was seen in 2011. When the Euro debt crisis unfolded, silver jumped to a record high of near $50 an ounce, as investors worried about another financial meltdown in the highly indebted EU.
With mounting risks in the modern financial system, silver will continue to play an even more significant role as a hedge against risk.
Inflation and Currency Risk: Inflation lowers the purchasing power of paper currencies such as the dollar, euro and pound. Over time cash, including your bank deposits and other investments tend to be worth much less as inflation bites. Silver, just like gold, can protect your wealth against inflation because its value is not dependent on the value of fiat currencies. In times of runaway inflation, local currencies can become completely worthless, forcing investors to seek safety in alternative currencies such as silver and gold.
Geopolitical Risk: When you buy property, stocks, cash deposits, or bonds, your investment relies heavily on politicians making the right choices for the economy. To protect your wealth from political chaos and reckless government policies, part of your wealth must be invested in assets whose value cannot be controlled, influenced or determined by politicians or banks. Silver, just like gold, allows you to invest a portion of your savings in a real asset with inherent value, which tends to appreciate in times of war, political or economic crises.
Overvalued Markets: To solve the 2008 financial crisis, governments unwisely chose to print currencies and flood the economy with cheap money, creating the so-called “tide that lifts all boats". This cheap money triggered a boom in every asset including property, bonds, and stocks. As the Federal Reserve and other central banks attempt to reverse this policy of quantitative easing, the bubble will almost certainly burst again. Silver as a safe haven investment may appreciate significantly once this correction occurs. Including silver coins in your portfolio can deliver a handsome profit as distress hits the markets.
Systemic Risks: Investment in highly speculative and risky financial products such as derivatives CFDs, spread betting and crypto-currencies has grown tremendously in recent years. To make matters worse, all major economies took on unsustainable amounts of debt in the name of stimulus packages during the 2008 crunch, while trade and budget deficits continue to expand. All these factors point to a global economic system riddled with immense risk. Buying silver coins as a portion of your investment can insure your wealth against such immense economic risks.
Short Term Profit: With almost every asset overvalued at the moment, it's tough finding an attractive investment for short term profit. However, silver is currently trading at what most experts believe is a substantially undervalued price. Compared to previous price movements, and taking into account the risk of a correction in the markets, few assets offer such an attractive buying opportunity in the short term. In comparison to gold the silver price is a lot more volatile and those who invest in silver for short term gain would want to be comfortable with these swings in valuation. Investing in silver for the short-term is not for the faint hearted due to the daily volatility.
What Makes Silver Such a Great Investment?
Every allocation in your investment portfolio must deliver a reasonable return while ensuring the safety of your wealth. As a precious metal like gold, silver is in demand for jewellery and other collectible items. However, silver also has the following unique characteristics which make it an in-demand investment:
Silver is Scarce: The above-ground quantities of silver have declined tremendously from a high of 2.2 billion ounces a century ago to less than 300 million ounces today. Furthermore, 80% of silver is produced as a byproduct in the mining of base metals such as lead and zinc. Therefore, supply is unlikely to increase significantly even if the price goes up. This was seen in the 1970s when silver prices soared to record highs of $50 an ounce without a corresponding spike in production.
Silver is Rarely Recycled: Unlike the more valuable gold, it does not make economic sense to recycle the small quantities of silver inside electrical components. Most silver is therefore never reclaimed after installation in medical devices, film, and electrical equipment such as phones and flatscreen TVs etc.
Potential for Larger Gains than Gold: In a bullish market for precious metals, the price of silver usually rises by a far higher margin than that of gold. For example, the silver price jumped 3,800% in the 70s as compared to a 2,500 % rise for gold. By investing the same sum of money in silver, investors are more likely to make a higher return than if they invested in gold.
Record Gold-Silver Ratio: When you look at recent and historical trends of the gold-silver ratio, silver is currently undervalued when compared to gold. From a ratio of 15-1 between the 1700s and the 1900s, the silver to gold ratio now stands at a record high of 88-1. Considering that in 1792 in the US, the gold to silver ratio was fixed by law at 15 to 1, then silver is grossly undervalued and is likely to gain significantly in the future.
Low Risk of Confiscation: Governments can and have confiscated gold from banks and private citizens during an economic crisis. This happened in the US in the 30s, as the Roosevelt administration struggled to contain the economic crisis. However, silver has never been confiscated before, and may, therefore, be a better option for those worried about government confiscation in their jurisdictions.
Why Should I Buy Silver Now?
Is it worth investing in silver now? After all, silver has traded much lower since its record highs during the 2011 Eurozone debt crisis. Markets are booming at the moment, and if you didn't know better, the world seems to be doing pretty well economically. However, as any financial expert will tell you, the current boom in the markets is a good reason to be fearful. Silver as an investment is a smart choice for the following reasons:
Geopolitical Risks Abound: The world seems to be lurching from one crisis to another. After the 2008 financial crisis, the 2011 Euro debt crisis was closely followed by the chaotic Arab Spring. Today, a severe trade war is brewing between the US and the rest of the world, while terrorism and the rise of populist and divisive politics threaten economic growth. Recent crises have taught harsh lessons to investors about hedging against risk. Buying silver now, as well as gold is no longer the preserve of the super wealthy; it is the prudent thing to do for all looking to protect and grow their wealth in uncertain times.
Systemic Risks are the New Normal: Never before has the global financial system been vulnerable to so many risks; bank failures, excessive public and private debt, massive budget and trade deficits, technological risks, speculative financial instruments, trade wars, and weak regulatory frameworks. Buying silver is one proven way of insulating your wealth from systemic risks that threaten to collapse the financial system yet again.
Rising Market Volatility: The constant seesaw of the markets from record highs to record daily losses should worry prudent investors. Market volatility is an ominous sign of the end of the current decade-long bull-run. If history is any indication, the current bull-run is long in the tooth, and another market crash may be imminent. Buying silver coins now will protect your hard-earned money should the bubble bursts.
Demand Outstripping Supply: Silver supply is essentially flat at the moment and will decline with time. As demand for mobile devices, flatscreen TVs, and personal electronics continues to grow around the world, silver will likely gain in value in the coming months and years. Investing in silver now is buying early into a potentially lucrative market.
Growing Industrial, Technological and Medical Demand: Silver is highly sought after in many industries including the technology and medical sectors for its high malleability, resistance to corrosion, good thermal and electrical conductivity and antimicrobial properties. This drives enormous demand for in silver in the manufacture of medical equipment, mobile phones, and in the energy industry. With these sectors of industry expected to grow especially in China, India, Vietnam, and other manufacturing hubs, buying silver today maybe a smart investment.
Increased Investment Demand: Fund managers and financial advisors are increasingly advocating silver as a hedge against geopolitical and financial risk. Although just like gold, silver has been a safe haven for centuries, the demand for silver as a profitable investment is growing. The proliferation of hedge funds, silver ETFs, derivatives markets, and affluent individuals looking for safe-haven assets has expanded the investment market for silver.
Silver is a Bargain: The current price of silver is historically low by many metrics. Measured against the historic gold-silver ratio, historical price trends, pervasive geopolitical risks and weak economic indicators, silver is grossly undervalued. Buying silver now is a rare opportunity to turn a decent profit in the medium and long term and to protect your wealth
Silver Is Affordable: At $17 an ounce, silver is more affordable than gold, which, at about $1,500 an ounce, is equivalent to 88 ounces of silver. A lower price per ounce means silver is more accessible to investors, and buying small quantities over time gives you the benefit of dollar/euro cost averaging.
Quantitative Easing Coming to an End?: The chickens of the 2008 financial crisis are finally coming home to roost. Central banks are attempting to tighten monetary supply to prevent runaway inflation after massive currency printing in the wake of the 2008 crisis. The easy money that lifted markets to record highs is drying up, and a significant price correction is inevitable.
Silver is a more speculative investment with price movements that are more volatile than gold, which can deliver a higher return on investment. As a rule of thumb, we have in the past recommended that 75% of your precious metal allocation is reserved for gold while allocating the remaining 25% to silver. We believe that such an allocation strikes the perfect balance between hedging against risk and delivering a potentially lucrative return on your investment.
Silver is somewhat more speculative than gold with daily price movements that are slightly more volatile than gold but less volatile than most stocks an indeed stock markets.
Silver tends to outperform gold in terms of return and can deliver a higher return on investment. However, silver’s real value is as a hedge and safe haven asset and the primary reason to own silver is not about wealth accumulation but about wealth protection and hedging risk in an uncertain world.