If you’re into coins, there’s a fascinating read on the American Numismatic Society’s website about one of the most famous coins of all: the “Tribute Penny.” That’s the coin Roman subjects used to pay taxes that prompted a famous biblical saying of Christ’s about divine and political authority: “Render to Caesar the things that are Caesar’s and to God the things that are God’s.”
While there is debate about the precise type of coin it was, most historians and coin enthusiasts seem to think it was made of silver. But as time went on, prices in the empire had risen so much and its currency had devalued so far that the emperor started requiring people to pay their taxes in gold.
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Fast-forward 2,000 years and gold and silver are generally no longer considered money as they once were. We now use systems of government-backed currencies that are subject to supply and demand considerations and the economic and political stability of the governments issuing them.
Without supply constrained by the backing of physical gold and silver, which have finite supplies, lax monetary policy resulting in ballooning money supply can create inflation. Lowering interest rates or increasing government spending can also cause inflation. So can supply shocks like rising oil prices that feed into many parts of the economy.
Over the centuries, gold has retained its allure as a hedge against inflation and declines in purchasing power because it is a real asset with a supply that is constrained by mining production and recycling, and with demand that can expand from different sources.
Often referred to as “poor man’s gold,” silver has many of the same attributes of its more expensive cousin. But is it valuable as an inflation hedge and, if so, how can you invest in it?
Investing in Silver vs. Gold
Gold is one of the most heavily traded commodities on the planet. Billions of dollars in gold contracts change hands each business day on major exchanges in London, New York and Shanghai, and lesser exchanges in Dubai, India, Japan, Singapore and Hong Kong.
While the primary source of global gold demand is for jewelry, it is also heavily used as a store of value that can behave differently from stocks and bonds. For example, if global equities are in a pronounced decline because of worries about instability in the Middle East, gold may rise as a so-called safe-haven investment. Central banks also use the metal as part of their reserves, and there is some industrial use for gold, primarily in electronics.
As a precious metal, silver is often viewed as having a parallel investment case as gold, and it often follows gold higher on futures markets.
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Industrial Applications for Silver
But industrial applications form a much larger percentage of demand for silver. It’s used in electronics, automobiles, mirrors and water purifiers. The energy transition away from fossil fuels is creating an important new source of industrial demand for silver, as it is used in solar panels and electric vehicles.
This industrial use can help silver as an inflation hedge in a way not seen in the gold market because rising consumer prices often accompany economic growth and an increasing demand for goods that use silver. At the same time, this adds an element of volatility to silver by tying it more to boom-and-bust economic cycles.
Volatility in the Silver Market
The silver market is also smaller than the gold market, which can exacerbate volatility. Because silver is much cheaper than gold, each dollar of investment in it represents a bigger percentage of its price than gold, potentially causing silver price swings to be larger than gold’s, even if the metals are moving in the same direction.
Investors may want to complement gold holdings with silver, says Alex Ebkarian, co-founder and chief operating officer of Allegiance Gold, a precious metals dealer. But both metals should be held as wealth preservers, without expectations that they will drive portfolio growth, he says.
Ebkarian says silver has some inflation-hedge characteristics, similar to gold, but that’s not its primary value driver.
“Silver is considered an inflation hedge like gold,” says Sean Casterline, a retirement plan consultant at Delta Capital Management. “However, while gold is primarily a store of value and a hedge against inflation and economic uncertainties, silver also has industrial uses. These industrial factors can cause silver prices to act in a manner that is more closely correlated to the broader economy. Both metals can act as safe-haven assets during times of financial turmoil, but the additional industrial demand for silver can lead to different price dynamics compared to gold.”
History of the Price of Silver
Since 1915, the inflation-adjusted price of silver has risen more than 40%, indicating that over the very long term the metal’s price can outpace inflation. 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 instability in Europe following the global financial crisis. But by 2020, the price of silver had dropped below $12 during the pandemic. On March 13, 2024, the most actively traded silver futures contract in New York settled at $25.156 an ounce.
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, 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. Also, keep in mind that paying for secure storage and insurance can subtract from any gains in the price of the investment.
Silver Futures and Options
Investors can also buy silver futures, or exchange-traded contracts in which the buyer agrees to purchase a standardized quantity of silver at a predetermined price on a future delivery date.
Meanwhile, options holders have the right but not the obligation to buy or sell silver at a certain price during a specified window of time.
Keep in mind that investing in futures carries a steep learning curve that involves knowledge of margin, leverage and the need to roll over contracts as they expire to avoid taking delivery of the metal.
“You have to be very sophisticated,” says Ebkarian.
Silver Mining Stocks
Investors can also buy shares of silver mining stocks. Some of the largest, most popular silver mining stocks include Fresnillo PLC (ticker: FNLPF), Coeur Mining Inc. (CDE) and Hecla Mining Co. (HL).
Silver miners can outperform the price of silver during times when silver is rising because they can use operating leverage to increase profits. 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. Mine accidents also happen.
Robert Minter, director of exchange-traded fund investment strategy at abrdn, says investors shouldn’t put money into silver mining stocks with the expectations that they will perform with the same portfolio-diversifying aspects as physical silver.
“The most common misconception we hear is that owning a silver mining stock is like owning silver with income,” Minter says. “We need look only at recent history to see how COVID shut down some mines, raised labor rates dramatically and caused supply and transportation issues. Each of these issues is positive for silver price as it contributes to a shortage of silver, but negative for the equity price of the silver miner because it could reduce revenue.”
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 miner that strikes it rich.
Also, silver ETFs aren’t limited to just 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 via highly liquid and well-managed funds,” says Liam Hunt, content director at Gold IRA Guide. “These funds track the price of silver and can be bought and sold instantaneously, without having to worry about physical storage procedures.”
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. For example, 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 that finance mining projects and receive a portion of the profits. Wheaton Precious Metals Corp. (WPM) and Franco-Nevada Corp. (FNV) are among the most popular.
Silver IRAs
Another way to invest in silver is through a silver IRA. These individual retirement accounts function similarly to a regular IRA except they allow investment in silver coins or bars.
There are exceptions to tax rules that classify metal and coin transactions as collectibles. “However, the coins or bullion must be held by the IRA trustee or custodian rather than by the IRA owner,” according to accounting and business advisory firm PKF Mueller.
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.
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Should You Invest in Silver? originally appeared on usnews.com
Update 03/14/24: This story was previously published at an earlier date and has been updated with new information.
