Should I invest in silver? | Invest

If you're interested in coins, the American Numismatic Association website has an interesting article about one of the most famous coins, the “tribute penny.” This was the coin used by Roman subjects to pay taxes, and was the inspiration for Christ's famous Biblical statement about God and political authority: “Render to Caesar what is Caesar's and to God what is God's.” became.

The exact type of this coin is debated, but most historians and coin enthusiasts seem to think it was made of silver. However, over time, prices in the empire rose so much and the value of the currency fell so much that the emperor began to require his people to pay taxes in gold.

After 2,000 years, gold and silver are generally no longer considered money as they once were. We currently use a system of government-backed currencies that takes into account supply and demand, as well as the economic and political stability of the governments issuing the currency.

If supply is not constrained by physical gold or silver backing, which has a finite supply, loose monetary policy can expand the money supply and cause inflation. Lower interest rates and increased government spending can also cause inflation. Shocks such as rising oil prices can also affect many parts of the economy.

For centuries, gold has maintained its appeal as a hedge against inflation and declining purchasing power. This is because gold is a real asset whose supply is limited by mining production and recycling, and whose demand can grow from a variety of sources.

Silver, often referred to as “poor man's gold,” has many of the same properties as more expensive silver. But is it valuable as an inflation hedge, and if so, how can you invest in it?

Gold is one of the most frequently traded commodities on the planet. Billions of dollars of gold contracts are traded every business day on major exchanges in London, New York, and Shanghai, and smaller exchanges in Dubai, India, Japan, Singapore, and Hong Kong.

Jewelry is the main source of global demand for gold, but it is also frequently used as a store of value, which behaves differently than stocks and bonds. For example, if global stocks drop significantly due to concerns about instability in the Middle East, gold, a so-called safe-haven asset, may rise. Central banks also use gold as part of their reserves, and there are several industrial uses for gold, primarily in the electronics sector.

As a precious metal, silver is often considered an investment similar to gold, and is often the second most expensive metal in the futures market.

However, industrial uses account for a much larger portion of silver demand. Used in electronic devices, automobiles, mirrors, water purifiers, etc. The energy transition away from fossil fuels is creating important new sources of industrial demand for silver, as it is used in solar panels and electric vehicles.

This industrial use could help silver as an inflation hedge in a way not seen in the gold market, as rising consumer prices often accompany economic growth and increased demand for products that use silver. At the same time, it becomes more tied to the boom-bust economic cycle, adding an element of volatility to silver.

The silver market is also smaller than the gold market, which can lead to more volatility. Because silver is much cheaper than gold, the price per dollar invested in silver is a larger percentage than gold, and even if the metals are moving in the same direction, silver's price movements can be larger than gold's. there is.

Alex Evkarian, co-founder and chief operating officer of precious metals dealer Allegiance Gold, said investors may want to supplement their gold holdings with silver. However, he says both metals should be held as asset protection rather than expected to drive portfolio growth.

Evkalian says silver, like gold, has properties as an inflation hedge, but it's not the main driver of value.

“Silver, like gold, is considered an inflation hedge,” said Sean Casterline, a retirement plan consultant at Delta Capital Management. “However, gold is primarily a store of value and a hedge against inflation and economic uncertainty. Silver, on the other hand, also has industrial uses. Both metals can act as safe-haven assets in times of financial turmoil, but increased industrial demand for silver will result in different price trends than gold. There is a possibility.”

Since 1915, the inflation-adjusted price of silver has increased by more than 40%, indicating that the metal's price can outpace inflation over the very long term. However, in the shorter term, silver, like many commodities, can be highly volatile.

For example, silver purchased in 1915 had lost about half its inflation-adjusted value by 2001. Silver prices soared to about $64 an ounce in 2011 due to the Federal Reserve's quantitative easing program and concerns about instability in Europe after the global financial crisis. . However, by 2020 during the pandemic, the price of silver had fallen below $12. On March 13, 2024, the most actively traded silver futures contract in New York settled at $25.156 per ounce.

One common way to invest in silver is to invest in the physical metal. Investors can purchase 99.9% pure silver bars weighing from 1 ounce to 100 ounces and bullion coins, such as the 1-ounce American Eagle produced by the U.S. Mint.

Investors can also purchase so-called junk silver coins. Prior to 1965, dimes, quarters, and nickels issued by the U.S. Mint contained large amounts of silver. Many coins are not collectible, but retain their value depending on their silver content.

Investors purchasing silver bullion should always use a trusted and established bullion or coin dealer, such as JM Bullion, APMEX, or SD Bullion. Also, keep in mind that paying for secure storage and insurance can deduct the return on your investment price.

Investors can also purchase silver futures, or exchange contracts where the buyer agrees to purchase a standardized amount of silver at a predetermined price on a future delivery date.

Option holders, on the other hand, have the right, but not the obligation, to buy or sell silver at a specific price within a specified time period.

Keep in mind that investing in futures has a steep learning curve, as it requires knowledge of margin, leverage, and the need to roll over expired contracts to avoid taking delivery of the metal. .

“It has to be very sophisticated,” Evkarian said.

Investors can also buy shares in silver mining stocks. Some of the largest and most popular silver mining stocks include Fresnillo PLC (ticker: FNLPF), Coeur Mining Inc. (CDE), and Hecla Mining Co. (HL).

Silver miners can use operating leverage to increase their profits, allowing them to outperform the price of silver during periods of rising silver. However, owning a company can introduce risks that are unrelated to the market price of silver. Management may make bad decisions or the mine may not perform as expected. There are also mining accidents.

Robert Minter, director of exchange-traded fund investment strategy at ABRDN, said investors should not put money into silver mining stocks with the expectation that they will perform on the same portfolio diversification dimensions as physical silver. .

“The most common misconception we hear is that owning silver mining stocks is like earning income and owning silver,” Minter says. “You only need to look at recent history to see how the coronavirus has forced some mines to close, dramatically increased labor wages, and created supply and transportation issues. Each problem contributes to a silver shortage, so it's positive for the price of silver, but negative for the world.'' Potentially lower profits require a lower share price for silver miners. ”

To reduce the risk of investing in a single mining company, investors can consider exchange-traded funds (ETFs) that group mining companies based on specific criteria.

But ETFs have costs that owning individual stocks don't have, and because of their diversification, ETFs may not perform as well as a single get-rich-quick miner.

Also, silver ETFs aren’t limited to miners. For example, iShares Silver Trust (SLV) and abrdn Physical Silver Shares ETF (SIVR) invest in physical silver, and Invesco DB Precious Metals Fund (DBP) invests in silver and gold futures contracts.

SLV and SIVR are “both excellent options for investors looking for exposure to the silver market through liquid, well-managed funds,” said Liam Hunt, director of content at Gold IRA Guide. talk. “These funds track the price of silver and allow you to buy and sell instantly without having to worry about physical storage procedures.”

Exchange-traded securities (ETNs) are debt instruments that act like a hybrid of stocks and bonds, potentially reducing risk for investors. For example, the Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO) is a silver ETN that tracks the price of silver and pays monthly distributions to investors.

Investors can also buy shares in silver streaming or royalty companies that fund mining projects and receive a cut of the profits. Wheaton Precious Metals Corporation (WPM) and Franco-Nevada Corporation (FNV) are the most popular.

Another way to invest in silver is through a silver IRA. These individual retirement accounts function similarly to regular IRAs, except they are allowed to invest in silver coins or bars.

There are exceptions to the tax rules that classify metal and coin transactions as collectibles. “However, coins and bullion must be held by the IRA's trustee or custodian, not the IRA owner,” says accounting and business advisory firm PKF Muller.

Over very long periods of time, silver has historically acted as an effective hedge against inflation. However, silver may not be the best way to protect your portfolio in any given year or decade.

Still, this metal has a relatively weak correlation with stocks and bonds, making it useful for diversifying your investment portfolio.

Experts vary in their recommendations on how much an investor should allocate to silver, but a good rule of thumb is to allocate about 5% of your portfolio to all commodities.