Silver Investing

No discussion of gold investing would be complete without at least a few words about gold’s close relative – silver. Many people associate silver with gold and look upon it as importantly the same kind of investment – a kindred metal, to make it simple – but the truth is that they are actually two very different metals and are used by portfolio planners for completely different purposes the story that silver is the poor person’s gold is one that has been told for a very long period of time in spite of the marked differences in the way they have worked under some economic conditions.

The importance of gold as a portfolio item is set primarily in its monetary value. It is first, a store of value and second, a commodity, even though it has performed well from a commodity perspective in the past. The situation is reversed with silver. First, it is a commodity and second, it is a store of value. As an essentially industrial metal, it usually does well in inflationary economies – sometimes extraordinarily well - but it can deflate severely in a depression.

Due to these reasons, silver plays an important secondary role in portfolio planning as a way to speculate against the dollar when the inflationary fires are fanned. Silver must not be used as a deflationary hedge for the clear reason that when the industrial production and economy are weak, the same thing happens for silver and its demand.

Silver must not be seen as either a semipermanent or permanent member of the family of the portfolio. It should be considered for its profit potential and at some time or another be reverted back into money or gold instead. In previous bull markets, even in minibull markets, silver has outperformed gold when talking about percentage.

Silver’s price history has been substantially more volatile than that of gold, with upsides as well as downsides much more pronounced. A correct call can help you end up with more gold in the long run than if you had purchased only gold to begin with. A bad call will cost you greatly. Be forewarned. By way of illustration, when gold climbed from the 320 dollar level to 430 dollars in 2003 – 2004, silver went from roughly 4.50 dollars to more than 8.00 dollars. It then dropped precipitously back to the 5.50 dollar level in just a few weeks. Gold’s downside was far less dramatic, bottoming near 380 dollars. As is shown, timing is everything with silver. It wouldn’t have been good for you to be one of the investors who bought into the market at 8.00 dollars.

Silver is particularly handy to wealthy individuals who have enough gold reserves and would like to branch out into something with stronger potential in profits. Silver depends on its market as an industrial commodity for future appreciation. Having that in mind, we shall briefly review the demand and supply fundamentals.

According to statistics supplied by the Silver Institute, silver production is spread evenly over a large amount of countries: Mexico roughly produces sixteen percent of the annual supply; Peru, fifteen percent; Australia, ten percent; and China, Poland, Chile, the United States, and Canada all in the seven percent range. Mine production has risen steadily overall since 1994, when four hundred fifty-one million ounces were produced in 2003, five hundred ninety-five million ounces were mined. These production figures are very possibly going to continue going up in future years. Silver production is primarily a byproduct of gold and copper mining. If higher prices are are in the cards for those metals, you can expect silver production to rise. Scrap reprocessing is an important component of the supply too. It has increased steadily over the past ten years too, from just over one hundred-fifty million ounces to roughly one hundred-ninety million ounces in 2003.

For silver to go substantially, industrial investments and uses will have to go up enough to outweigh any production increases and, nowadays, the uses of silver, including photography, are declining or static at best. At this time, the principal uses for silver are industrial (thirty- nine percent of the supply), photography (twenty-two percent), and jewelry/silverware (thirty-one percent). Photographic usage has been static since the mid-1990s at roughly 200 to 220 million ounces. Physical silver sales for investment have gone down in recent years, but they will probably pick up if metal prices start going up.

The average price of silver has been steady to down: 5.28 dollars in 1994, 5.22 dollars in 1999, and 4.87 in 2003. Presently, the people who buy silver for investment do so primarily on the exchanges or options markets. (Investors and hedgers both prefer gold because it is less weighty and cumbersome.) Silver should be an addendum to the overall portfolio for most investors, acquired only after a strong gold position has already been established.