Is Silver a Good Investment 2012?
| September 1, 2012 | Posted by Kevin under Investment Idea |
When it comes to commodities, especially metals, gold usually steals the spotlight. Gold prices are quoted almost universally. Silver, on the other hand, is often seen as secondary metal. But should you consider investing in silver? What are the reasons why you should—or shouldn’t—invest in silver?
The arguments in favor of silver
There are strong arguments favoring silver as an investment; here are some of the major ones.
Strong price growth in the past decade. In 2002 silver could be bought for less than $5 an ounce. Today, it’s trading in the $30 range—that’s a six fold increase. Over the same decade, the stock market has no more than doubled.
Silver tends to rise faster than gold. When it comes to commodities, and especially to “crisis investments” (investments that perform well in response to global crisis), gold is seen as the international bell weather. But the truth is that silver tends to outperform gold during periods of crisis. If your reason for holding metals is as a hedge against calamity, silver may be the metal of choice.
It’s much cheaper than gold. More people can afford silver, which means that in a price run or general panic, demand will be greater. This may be the reason why silver rises faster than gold during panics. While gold may attract thousands of buyers in a crisis, silver—as the “poor man’s gold”—can attract millions.
It’s an alternative to currency. Silver might very well be the ultimate barter commodity in the event of currency problems. Though gold is usually thought of the ultimate alternative to currency, silver has far better potential as a barter commodity. The price is low enough that millions of people can hold it and trade it, in addition to the fact that it’s also low enough in price that it can be used for ordinary purchases. At current prices, gold is mostly for the rich since no one would be able to make change for a gold coin valued in the $2,000 range.
No central bank selling. One of the factors that has weighed on gold in the past has been central bank selling. They have huge gold holdings and significant selling can send gold prices straight down. But central banks don’t hold silver, so it’s not likely that huge amounts of silver can be dumped on the market crashing the price.
The arguments against silver
There are as many arguments against investing in silver as there are favoring it.
Strong price growth in the past decade. The same reason for buying silver may also be one of the strongest arguments against it! Silver has risen in price by six times since 2002, which could mean that most of the price growth is behind it. Already, the metal has given up one third of it’s near term price peak of $46 since the spring, 2011. This could be signaling that silver is too expensive right now, and due for more reversals. And when silver falls, it usually falls hard.
Price volatility. As stated in the “arguments for” section above, silver both rises and falls in price faster than gold. And since gold itself is hardly a stable price commodity, that means silver is down right volatile compared to many paper investments, such as Treasury bills or certificates of deposit. This price volatility argues heavily against taking a large position in silver.
Silver pays no interest or dividends. Similar to gold, there are no financial benefits to holding silver beyond higher future prices. During the time you own your silver, there will be no income in the form of interest or dividends. This factor also contributes to silver’s price volatility, since interest and dividends can create a floor in the price.
There are costs associated with buying and selling. Not only does silver not pay interest and dividends, but it also costs you money to buy and sell it. While you can invest in Treasury bills and certificates of deposit free from any transaction or maintenance fees, you will pay fees to both buy and sell your silver. And while you’re holding it, you may have to pay maintenance fees such as storage and insurance. Since silver is a physical commodity, it must be safeguarded. (There are of course ways to buy silver without taking physical possession of it, but those also involve transaction fees.)
Much of silver’s demand is from industrial uses. One of the biggest risk factors with silver as an investment is that much of the demand for the metal is industrial. If you want to buy silver as a hedge against inflation or some other calamity, it’s possible that the same crisis will lower industrial demand for silver and even lower it’s price.
Should you invest in silver?
Since there are reasons going both ways on investing in silver, maybe the decision comes down to personal considerations more than anything else.
If you want precious metals but can’t afford gold. If you have $2,000 to invest in metals, you could buy only one ounce of gold—but you could buy well over 60 ounces of silver for the same investment. If you wanted you could later sell off a portion of your silver and continue to hold the rest. With gold, it will be an either/or choice if you need to sell.
As a diversification to gold. Silver can be a precious metals diversification that includes both metals. Though they generally move in tandem with one another, there are factors—such as central bank selling—that may impact gold more than silver.
If news headlines forecasting financial chaos spook you. Even if the worst case scenarios never play out, having some money invested in silver may be just what you need to sleep better at night. Think of silver as a diversification to cash!
As a bequest to your heirs. Here’s a fact: silver has been a financial commodity for thousands of years. Currency is relatively recent and can be debased by inflation. By investing in silver, you’ll be guaranteeing that you’ll be leaving an asset of timeless value to your loved ones.
Should you invest in silver? There are plenty of arguments both ways, but ultimately, it comes down to your own preference.
What do you think about silver as an investment? If you are considering the investment then I have a post here for you which tells you about 5 ways to invest in silver
(Silver price data source: Kitco Historical Silver)
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.
