Investing in Silver: What Investors Need to Know

Should you invest in silver? Silver allows you to invest in popular, practical sized bullion – coins, bars or rounds – at a much lower and more reasonable price point than gold. 

Like gold, this precious metal has been a recognized store of value – the basis of all currency – for thousands of years. Its supply is finite:

It’s very difficult and expensive to find and extract silver from the ground. While the Federal Reserve can wave a magic wand and increase the fiat currency money supply by decree, there is no way the Federal Reserve can wish more silver or gold into being. 

The Case For Silver

It’s a naturally scarce commodity, which makes gold and silver resistant to deflation. People have always paid a premium for gold and silver, and mining has not been able to keep up with demand.

Silver performs most of the major functions of gold within a diversified portfolio: 

• It's an effective hedge against inflation.
• It functions as a reserve currency in the event of a hyperinflation crisis or general economic collapse. 
• It provides positive returns over time, but is not highly correlated with stocks, providing a diversification benefit. 

In some ways, silver works even better than gold: It has historically outperformed gold during bear markets. 

The price of silver is also historically more volatile than gold – particularly during precious metal bear markets. Investors who buy silver when it’s on sale at unusually depressed prices can get even more diversification benefit thanks to the inherent volatility of the metal.

Another way of looking at the same phenomenon is this: 

From an asset allocation standpoint, silver investors can get the same diversification benefit that they can with gold, with a lower dollar commitment. 

Industrial Uses

Silver is an excellent electricity conductor – even better than gold – which makes it an in-demand commodity for many industrial uses. 5G cellular technology is likely to require large amounts of silver. The metal is critical to making solder/reflow, pasts, bonding wire, and electroconductive adhesives that are instrumental in rolling out 5G technology, which is not going to be limited to cell phones.

5G technology is set to transform all kinds of household and business applications, from appliances to communication to security.According to a recent Silver Institute report, Silver consumption is also expected to rise due to the manufacture of conductive rivets and springs, spark plugs, silver oxide batteries, and many others. 

Related: Gold Vs. Silver - Which Should You Own?

In Historical Terms, Silver is Underpriced.

Over the course of the 20th century, silver commanded a price averaging 1/47th of an equivalent amount of gold. 

Silver peaked against gold in 2011, trading at a 1:31 ratio relative to gold. That is, the price of an ounce of gold bought 31 ounces of silver. From that point, the price of silver fell steadily relative to gold, reaching a 1:80 ratio in 2016. 

A Bet on Recovery. 

But at current prices, silver is trading at a well under half that ratio, at 1/107th the price of gold as of May 16th, 2020. That's a once-in-a-lifetime level. By this measure, silver is significantly underpriced – and poised for a recovery. 

The last time silver traded at this price point relative to gold was during the post 9/11 stock market crash and recession. It traded at this point again during the Great Recession of 2008-2010 – possibly due to a reduction in industrial demand that drove the silver price down.  

The last time we saw a major stock market crash, during the mortgage crisis of just over a decade ago, the price of gold appreciated 166% from bottom to top. The mortgage crisis saw silver prices as low as $11.64 per ounce.

But then it rallied to $50/oz in short order, even as the price of gold reached its all-time high. Even so, silver’s recovery performance in the previous financial crisis dwarfed that of gold, rising 448% from trough to peak during that market cycle. 

So even a small exposure to silver in a diversified portfolio can make a meaningful difference in reducing overall portfolio volatility, boosting expected returns in bear markets. 

Over time, gold and silver tend to be highly correlated. But they've parted company in recent months: Gold has appreciated strongly since January and now sits near seven-year highs, while silver has been lagging behind since the beginning of the year. 

Early indicators are that silver may be beginning to break free of the resistance that has been weighing on its performance since the beginning of the year. This is a bullish indicator for both gold and silver, and serves to help confirm and support the recent and spectacular rise in gold prices that took the yellow metal to near its current seven-year high. 

Regression to the Mean

Over time, prices have a strong tendency to revert to historical averages. Major variations tend to be smoothed over by market action. Gold is now trading at about $1,762 per ounce. If silver returns to its long-term price relative to gold, at 1/47th the price of gold per ounce, it would trade at a spot price of $37.49 per ounce.  That’s well over double the current silver spot price of $15.59 per ounce. 

At these levels, silver appears to have more price upside than gold, with much less downside. 

Investors selling gold to buy silver are selling high to buy silver at a bargain price. 

The ratio has gone so far out of whack that some risk-tolerant investors are even playing it like an arbitrage, going long on silver while shorting gold, either via futures contracts or exchange-traded funds (ETFs). 

Silver in IRAs

If you are acquiring silver for your IRA, do not try to hold the silver yourself. All physical silver in your portfolio should be held by an IRS-approved custodian, such as a vault company. Also, be advised that not all forms of silver are approved as IRA investments. Only bullion bars and coins of sufficient purity and provenance may be held within an IRA. For more information, see our article on precious metals IRAs. 

Investing in Silver? A Word About Risk

If you’re thinking of buying silver as an investment, you should be prepared for a wild ride: Silver is historically much more volatile than gold. It can lose 50% within a year, or rise hundreds of percent. 

If that bothers you, you may want to confine your precious metals plays to gold, even at the higher entry point. You should also limit your silver exposure to a level that if it fell by 40 percent in 12 months, you wouldn’t lose any sleep over it, and might be inclined to buy more.