The stock market isn’t the only place investors stash their money for the future. In fact, most successful investors spread their money over a wide range of asset classes, from stocks to bonds to precious metals.
As you diversify your portfolio, you might buy gold, especially in times of high inflation. However, you might also hear about silver as an investment. With an ounce of silver costing far less than a comparable amount of gold, this potential opportunity is hard to ignore.
Although silver is a precious metal, it’s quite different from gold as an investment, coming with its own list of pros and cons that should be considered. Here’s what you need to know.
Is Silver a Good Investment?
Silver investments fit into some portfolios and not others. The price of silver tends to fluctuate more than that of gold, but it still offers a strong inflation hedge and store of value.
Silver is a great investment for the right investor. For the wrong investor, it’s a headache. Read on to determine whether it will fit well in your portfolio.
Pros of Investing in Silver
As an investment vehicle, silver has its advantages, the most compelling of which include:
1. Cheaper Than Gold
As you begin to diversify your investment portfolio with precious metals, the first one you’ll likely look at is gold. But when you do, you might be shocked at its price. As of early 2024, a single ounce of gold is worth $2,189.
Silver prices are substantially lower than gold prices, with an ounce of silver selling for around $25 in early 2024. This solves a big problem, especially for new investors with relatively small portfolios.
Diversification is key, but when a single ounce of gold costs nearly $2,200, diversifying a portfolio with the yellow metal is difficult unless you have a high-value portfolio. On the other hand, with silver trading at around $25 per ounce, it is far easier to buy up a few coins as a way to diversify a smaller investment portfolio.
2. Safe Haven
Fluctuations in stock prices are commonplace. That’s why it’s important to include safe-haven assets in an investment portfolio to offset declines when stocks aren’t performing as investors had hoped.
Although silver investments come with a higher level of volatility than gold investments, there’s a known negative correlation between silver and stocks. That means silver prices and the stock market tend to move in opposite directions. Therefore, when the stock market is down, gains in silver holdings help investors weather the storm.
3. Potential Inflation Hedge
Over time, prices for goods tend to rise because inflation is built into the economic machine. This means that when considering safe-haven assets for your portfolio, it’s important to also consider inflation.
Some assets may grow in price but lose buying power in high-inflation environments. For example, bonds continue to provide income but their face value loses buying power when inflation is high.
Other assets, like silver and other precious metals, have a positive correlation with inflation, meaning that when prices rise, they rise too.
Silver is a compelling store of value. When prices for general goods are up, silver prices tend to follow. This is largely because silver isn’t just an investment; there are several industrial uses for the metal as well.
4. Simplicity
Investing in silver is simple, especially buying physical silver (we’ll discuss the different types of silver investments below). There’s no need for technical chart analysis, a brokerage account, or even an understanding of the stock market.
However, it is wise for investors to consider the state of the economy, inflation, and how those factors play a role in the price of silver before diving in.
Once you decide it’s time to buy, simply visit a silver bullion website online and place an order or walk into a local coin and jewelry shop to buy your precious metals. That’s quite unlike the stock market, where there are countless stocks to choose from, and the research it takes to choose wisely proves to be overwhelming for many people.
5. Portfolio Diversification
Diversification has been likened to insurance for investors. By spreading investments across a wide range of assets, if something goes wrong with an asset or group of assets in the portfolio, gains in others will help to alleviate the pain.
Silver has long been used by some of the most successful investors as a means of diversification. Famous investors like George Soros and Carl Icahn have publicly discussed buying silver and silver stocks as ways to hedge market risk.
With billionaire investing gurus diversifying their portfolios with silver, it only makes sense that most others should consider it too.
6. Tangibility
Stocks, bonds, CDs, and high-yield savings accounts don’t offer anything tangible, but when you buy silver, you’re buying something you can hold. There’s peace of mind in knowing you have an asset of value that you can actually touch.
Moreover, for those with children, showing a physical asset when teaching them about investing and personal finances may help capture their attention and allow your lessons to sink in deeper.
7. Industrial Demand
It’s important to remember that silver is not just a good investment because there’s investor demand for it, but also because it has many industrial uses.
The industrial uses of the metal include solder and brazing alloys, dentistry, microchips, medicine, nuclear reactors, batteries, solar energy, and touch screens. Silver is a component in a wide range of consumer products you likely have in your home.
The fact that there’s significant industrial demand for silver means that the metal has the potential to increase in value, even when other less industrial precious metals like gold are falling.
Cons of Investing in Silver
Sure, there are plenty of reasons to consider diving into silver (figuratively — doing so literally would be a huge mistake). But there are also some significant drawbacks to consider, including:
1. Storage Issues
Silver is relatively inexpensive, and making consistent investments over a long period of time will yield you a large cache of the metal. Storing a large amount of silver at home is unreasonable for many due to space and security limitations.
While there are depositories and other storage options, taking advantage of them increases the cost of the investment, cutting into your potential returns. You can store your silver in a safety deposit box if you’re not interested in working with a depository.
2. Liquidity
When investors decide it’s time to sell their silver, they’ll encounter another hurdle. Unlike stocks, which can be sold digitally in the blink of an eye, silver has a bit of a liquidity barrier.
To sell physical silver, you’ll need to find a buyer. This can be done on a peer-to-peer basis with websites like Facebook and Craigslist, or it can be done by working with a broker. Either way, there’s quite a bit more hassle involved in offloading silver than there is in exiting a stock investment.
3. Volatility
The silver market doesn’t experience as much volatility as the stock market, but prices aren’t as stable as the price of gold either. This price volatility presents opportunities for investors to increase the productivity of their safe-haven holdings, but it’s also a turnoff to the more risk-averse members of the investing community.
4. Speculative
Like most commodities, the price of silver is influenced by speculation and supply and demand. When the investing and industrial communities think the price of silver will rise, they make big purchases, further pulling supply out of the market and increasing demand, driving up the price.
Conversely, if the investing and industrial communities believe the price of silver will fall, investors tend to sell the metal and take their profits, while industrial buyers slow their orders hoping to cash in on lower prices in the near future. This leads to price declines.
The speculative nature of silver results in an increased risk that some investors won’t be comfortable with in the safe-haven corner of their portfolios.
5. No Yield
Many other assets used to hedge against inflation and volatility, such as bonds, offer investors a form of income rather than price appreciation. While silver investors hope the metal’s price will increase, there’s no dividend, no yield, no income whatsoever while they hold it. This lack of yield is a turnoff for many investors, especially retirees and others who depend on income generated from their holdings.
6. Taxes
Any holdings of physical precious metals, including physical silver, are considered by the IRS to be collectibles, the sale of which has the potential to generate capital gains.
Taxes on capital gains from collectibles work slightly differently from gains from stocks or bonds. Long-term capital gains on stocks and bonds are taxed at a maximum rate of 20%. However, precious metals like silver and gold, or other collectibles, carry a maximum capital gains rate of 28%.
Just like stocks, short-term capital gains from precious metals held for less than one year are taxed as ordinary income.
How to Invest in Silver: 4 Ways to Get Exposure
There are several ways to gain exposure to silver. The most common options include:
1. Invest in Silver ETFs, ETNs, Mutual Funds, or ETCs
The most common and easiest way for investors to gain exposure to the silver market is through bucket investments like exchange-traded funds (ETFs), exchange-traded notes (ETNs), mutual funds, and exchange-traded commodities (ETCs) that invest in silver or precious metals.
These investments are managed by Wall Street professionals who pool investment dollars from a large number of investors to invest on their behalf according to criteria outlined in the fund’s prospectus.
There are several ETFs, mutual funds, and other bucket investments that invest in physical silver, silver stocks, and other silver-related assets. Investing in these funds takes much of the research and responsibility off the investors’ shoulders, letting the pros make the hard decisions for them.
On the other hand, pros don’t work for free, and some fund managers are better than others. Before investing in these types of assets, compare a few funds’ performance and expense ratios to get a full understanding of the investment you’re making.
2. Buy Silver Stocks
Another compelling way to access the silver market is to invest in silver-industry companies. There are two ways to do so:
Silver Mining Companies
One option is to buy stock in silver mining companies. When the price of silver rises, mining companies will generate more revenue from their core product, resulting in higher earnings and potential growth in stock prices.
Silver Streaming Companies
Mining is an expensive business. Companies spend millions of dollars on land, equipment, personnel, and energy. Some companies, known as streaming companies, are aimed at providing the upfront funding that mining operations need to get new mines off the ground.
In exchange for the funding, silver streamers have the right to either claim a portion of assets mined or a portion of the profits from the sale of assets mined. So, when the price of silver goes up, the assets to which streaming companies have a claim provide larger revenues and earnings for them, resulting in increasing stock prices.
Caution: It’s crucial for investors to do their due diligence before investing in any stock. Not all mining companies and streaming companies are created equal. Some will perform well, while others perform poorly.
3. Buy Silver Futures
Silver futures are some of the most speculative of silver investments. These assets are contracts between a silver buyer and a silver seller. Through the contract, the buyer agrees to take delivery of a predetermined amount of silver for a predetermined price on a predetermined date.
For most futures traders, the goal is to earn money as the price of silver fluctuates rather than actually take delivery of the silver. Nonetheless, this is a high-risk option for accessing silver markets and should only be considered by investors and traders with plenty of experience.
4. Buy Silver Bars or Coins
Of course, there’s no shame in buying physical silver itself. While there are several different designs available, there are two distinct categories for physical silver:
- Silver Coins. Silver coins are usually sold as one-ounce coins about the size of a half dollar. They come in a wide range of designs, some of which are scarce, which increases collector demand.
- Silver Bars. Silver bars are generally sold in sizes of 10 ounces or higher. They also come in a wide variety of designs, some of which are highly collectible.
Whether you’re buying coins or bars, physical silver is known as bullion. When you see the terms silver bullion coins or silver bullion bars, what you’re getting is investment-grade silver, generally at or just above the metal’s spot price.
When buying silver, it’s best to work with companies that own their own mines rather than brokers. Working directly with suppliers cuts out the added cost of the middleman but may require the purchase of larger quantities.
Moreover, if you decide to invest in scarce bullion designs, there’s added risk to consider. The cost of these bullion designs will be higher because of their collectability. However, any collectible can experience a lack of interest. At one point, Beanie Babies sold for thousands of dollars; today, you could probably find them at a yard sale on Saturday.
Until you develop a keen sense of the designs that will maintain their collectibility, it’s best to buy standard coins and bars that don’t have value due to design scarcity.
Final Word
Countless investors use the commodity as a way to bring safety to their portfolios, and there’s a strong chance it will fit well in your portfolio in one form or another as well. Nonetheless, as with any investment decision, investors should do their research before making an investment in silver.
Aspiring silver investors should weigh the pros and cons and carefully consider how you’ll access the market if you decide silver is a strong option for you.
