Silver is sometimes referred to as the “poor man’s gold.” As precious metals, both silver and gold can rise in price if investors want a safe haven during times of economic uncertainty, and both can hold their value better than some other assets during times of inflation.
But in another sense, silver could be considered the “rich man’s copper” because silver is much more widely used as an industrial metal than gold. This can help silver as an inflation hedge in a way not seen in the gold market because rising prices often accompany economic growth and an increasing demand for goods that use silver.
If you’re thinking about investing in silver as an inflation hedge, here are several factors to consider:
— Investing in silver vs. gold.
— History of the price of silver.
— How to invest in silver.
— How much to invest in silver.
— Outlook for silver in 2023.
[Sign up for stock news with our Invested newsletter.]
Investing in Silver vs. Gold
“Silver is often considered as ‘second gold’ and thus an inflation hedge,” says Roberta Caselli, commodities research analyst at Global X ETFs. “However, there are two critical differences between the two precious metals: silver’s additional industrial usage and their relative market sizes.”
In addition to its use in bullion and coins, silver is one of the most common metals used in jewelry. And it has a wide range of industrial applications for solar panels, electronics and electric vehicles. In 2021, industrial silver fabrication rose more than 9% to more than 508 million ounces, according to the latest World Silver Survey produced by Metals Focus for The Silver Institute.
In addition to having a much bigger role as an industrial metal than gold, there is another key difference between the two metals that investors should keep in mind: “The gold market is enormous; the silver market, however, is much smaller and tends to be more volatile,” Caselli says.
History of the Price of Silver
When adjusted for inflation, the price of silver has risen roughly 40% since February 1915. This is good for investors who want an inflation hedge and are planning to keep the investment for a long time.
But in shorter time increments, silver, like many commodities, can be quite volatile. For example, silver bought in 1915 had lost about half of its inflation-adjusted value by 2001. The price of silver spiked to about $64 per ounce in 2011 over concerns about the Federal Reserve’s quantitative easing program and geopolitical instability in Europe following the global financial crisis. But by 2020, the price of silver had dropped below $12 during the pandemic. It later shot up to about $30 in early 2021 as expectations of a global economic recovery took hold.
Recently, silver prices have been under pressure as the Fed has raised interest rates. Rising interest rates tarnish silver’s appeal as an investment because the metal doesn’t pay interest like Treasurys do.
“The most recent U.S. inflation data showed the pace of consumer price increases eased, and the silver price has declined,” says Sam Boughedda, equities trader and lead stock market news writer at AskTraders.com.
But with an outlook for more industrial demand, especially from solar farms, silver is catching up with gold’s reputation as an inflation hedge, says Collin Plume, CEO of Noble Gold Investments, a firm specializing in precious metals-based individual retirement accounts, or IRAs, and home delivery.
How to Invest in Silver
Physical metal. One popular way to invest in silver is to invest in the physical metal. Investors can buy 99.9% pure silver bars ranging in weight from 1 ounce to 100 ounces or bullion coins such as the 1-ounce American Eagles the U.S. Mint produces.
Investors can also buy so-called junk silver coins. Prior to 1965, all dimes, quarters and half-dollars issued by the U.S. Mint contained large quantities of silver. While many of the coins have no collectible appeal, they maintain value tied to their silver content.
Any investor buying silver bullion should be sure to use reputable, well-established metals or coin dealers, such as JM Bullion, APMEX and SD Bullion.
“The advantage of physical ownership is that its value closely tracks the price movements of the broader silver market,” Caselli says. “However, one downside is that dealers can charge premiums to buy and sell silver, which can dramatically reduce returns. In addition, there can be costs of storage, such as buying a safe or renting a safe-deposit box.”
Silver futures. Investors can also buy silver futures, exchange-traded contracts where the buyer agrees to purchase a standardized quantity of silver at a predetermined price on a future delivery date.
Futures contracts are a popular way for investors to speculate in the silver market or hedge their portfolios. The contracts provide direct exposure to physical silver without the hassle of delivery or storage because they can be easily sold at any time prior to expiration.
“Paper trading provides investors with exposure to silver without needing to physically hold the metal, potentially improving liquidity and reducing the cost of ownership,” Caselli says. “Unlike the bullion market, futures markets can also allow investors to use leverage.”
Silver mining stocks. Investors can also buy shares of silver mining stocks. Some of the largest, most-popular silver mining stocks include Pan American Silver Corp. (ticker: PAAS), SSR Mining Inc. (SSRM) and Hecla Mining Co. (HL).
“Silver miners have traditionally outperformed bullion in bullish markets due to how these companies use their operating leverage to increase profits, which might lead to a boost in share prices,” Caselli says. “Unlike investing directly in silver, miners can expand production as profit margins grow.”
But owning a company can introduce risks not associated with the market price of silver. Management can make bad decisions, or a mine might not pan out as expected.
Silver ETFs. To help cushion the risk of investing in single mining companies, investors can consider exchange-traded funds, or ETFs, that group mining companies together based on certain criteria. But ETFs have costs that owning individual stocks don’t, and because of the diversification, an ETF may not perform as well as a single gold miner that strikes it rich.
Silver ETFs invest in a diversified basket of silver-related assets, such as silver company stocks, physical silver bullion or silver futures contracts. For example, iShares Silver Trust (SLV) invests in physical silver, Global X Silver Miners ETF (SIL) invests in silver stocks and Invesco DB Precious Metals Fund (DBP) invests in silver and gold futures contracts.
Silver ETNs. Exchange-traded notes, or ETNs, are debt instruments that operate like a hybrid between a stock and a bond, potentially tempering investor risk. Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO) is a silver ETN that tracks the price of silver and pays a monthly distribution to investors.
Silver streaming stocks. Investors can also buy shares of silver streaming or royalty companies. These companies don’t mine silver directly. Instead, they finance a mining project and receive a portion of its profits. Popular silver streaming stocks include Wheaton Precious Metals Corp. (WPM) and First Majestic Silver Corp. (AG).
Silver IRAs. Another way to invest in silver is through a silver IRA. “A silver individual retirement account allows you to invest in physical silver and serves as a good hedge against inflation by having a tangible asset in your portfolio,” Plume says.
How Much to Invest in Silver
Over very long periods of time, silver has historically served as an effective hedge against inflation. However, in any given year or decade, silver may not be the best way to protect your portfolio.
Still, the metal has a relatively weak correlation to stocks and bonds, so it can help diversify an investment portfolio.
Experts vary in their recommendations for how much investors should allocate to silver, but a good rule of thumb is to allocate about 5% of your portfolio to commodities as a whole.
Outlook for Silver in 2023
If you want to try to take advantage of silver as a shorter-term investment vehicle, you’ll want to pay attention to several factors. One of them is the gold-silver ratio, which is the amount of silver that can purchase 1 ounce of gold.
“Over the last 30 years, this ratio has averaged 65,” Caselli says. “Currently, the ratio is near 85, possibly indicating that silver is undervalued relative to gold. Looking at historical data, when the ratio tops 80, it signals that silver is relatively inexpensive relative to gold, which is a bullish signal for silver.”
David Morgan, a precious metals analyst and publisher of The Morgan Report financial newsletter, forecasts that silver will move past $30 an ounce this year as inflation rebounds and the Fed increases interest rates more than expected.
“History has shown us that spot silver prices rise when inflation soars,” Morgan says. “There’s a very good chance that inflation will remain sticky and could even rebound in the months ahead, driving up spot prices for silver and gold.”
More from U.S. News
How to Invest in Black-Owned Businesses
7 Best Natural Gas Stocks to Buy in 2023
Should You Invest in Silver as an Inflation Hedge? originally appeared on usnews.com
Update 02/24/23: This story was published at an earlier date and has been updated with new information.
