Silver is probably the second most popular precious metal used for investing purposes, the first one being of course gold. It has long been taunted as an alternative store of value and a safe haven for investors who feared overpaying for gold. But what makes silver actually a bad investment?
Buying silver is not an investment. Owning silver – or any other precious metal – does not yield any return except for when the asset is sold at a higher price. Thus, it is a non-productive asset and should rather be treated as a speculative instrument.
While this may seem overly critical of the role silver has played historically, we’ll go into more depth in this article to explore whether owning silver is a bad investment and what the alternatives are. I’ll also compare buying silver to buying gold and highlight some more sound ways of gaining exposure to the silver industry sector. So, let’s get started!
Is silver actually a good investment?
Perhaps you may have heard that silver boasts a phenomenal return starting around $5 per ounce in 1971 and skyrocketing up to $20 per ounce currently. After all, that is an ROI of 400% over 50 years! Not that bad.
If we put in this terms of a CAGR (compound annual growth rate) we would have achieved a rate of around 8% (400 divided by 50). Likewise, the chart below shows a potential portfolio growth if invested 100% in silver at the start of 2007. Not so bad, right?
However, the true relative return of silver can only be measured when compared to different asset classes. This is also known as the opportunity cost of investing in silver. Or in other words, what’s the benchmark to compare the return of silver with?
The chart below shows the same graph as above for a silver portfolio (blue) and also includes the total stock market return for the same timeframe:
The visuals speak for themselves in this case. Not only does the stock market outperform the silver price by a healthy margin, but it also grows at a more or less steady pace over time while the value of silver swings up and down erratically.
But there are some other underlying principles that make silver a bad investment. In the following section, I’ll go into more detail!
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Why investing in silver is a bad idea
The real reason that investing in silver is a bad idea has actually nothing to do with the returns over the past 20 years. The true reason for banishing silver from your investment portfolio forever has to do with the very definition of investing itself.
The main reasons why investing in silver is a bad idea are:
- Speculation: When buying silver and waiting for its price to go up we are simply speculating. As investors, we always need to be aware of the difference between speculating and investing.
- Non-Productive: Owning silver does not generate any income as it is a non-productive asset. Ideally, you would want to own investment assets that add to your cash flow.
- Storage/Security: When buying physical silver storage and security are real concerns. While you can store silver at home doing so in large amounts quickly becomes unfeasible.
An investment is supposed to produce steady and predictable returns while also appreciating value over time. The key word here is “producing”. All investments produce or create some kind of return for their investors such as dividends, rental income, or business profits. Assets that can only bring in a return once they are sold are by definition not investments.
Sure, the price appreciation of a stock or of a property is a nice side-effect of owning that asset but it is by no means the sole reason for investing.
What will silver be worth in 10 years?
With that said, betting on the price of a certain commodity – whether it’s silver or any other precious metal – is nothing more than speculating on that commodity’s price to rise. In other words, the only way to make a profit buying silver is to sell your silver at a higher price to the next buyer. This is also known as the greater-fools-fallacy.
Whether it is a timeframe of 10, 5, or 2 years, nobody can accurately predict the price of any good traded on a public market. While scarce recourses should in theory become more scarce as they are being used up this process could take anywhere from decades to centuries until it is reflected in the market price; a time span far greater than that of most human life.
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Is investing in silver better than investing in gold?
Silver is sometimes compared to its younger brother gold, which replaced silver as a currency in the old world. Gold appears to be the more trusted asset worldwide to store wealth in and hedge against inflation. But how have these two assets actually performed in the past?
The chart above shows the growth of two distinct portfolios: one invested 100% in gold (red line) and the other invested 100% in silver (blue line). Over the past 15 years, gold has outperformed silver by nearly 2:1. Gold generally tends to be less volatile than silver and is the asset most people go to when hedging against economic and systemic risk.
While the chart shows the superiority of gold in terms of historical returns, the golden precious metal suffers from the same shortcomings as silver when it comes to using it as an investment vehicle (see above).
But wait! There are some legitimate ways to actually invest in silver, not speculate.
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How to invest in silver
During this whole post, I have been telling how unsuited silver is as an investment but I have failed to mention until now that there are some ways to gain exposure to the value of silver while also acting as a prudent investor. Here’s how:
- Silver Trusts: Silver trusts are the most convenient way of directly owning silver without the storage and safety concerns. If you absolutely must own silver then these trusts are the way to go!
- Silver Miners: A better way to add silver exposure to your portfolio is via silver miner ETFs. These mining companies should generally appreciate when the price of silver increases and what’s more they pay dividends all along the way. Win-win.
- Silver-Related Industries: Another option is to diversify your silver exposure among silver-related industries such as transport, refinement, storage, or jewelry. This widens your options and reduces risk through diversification.
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