What Are the Dangers of Silver Investment?

Investing can be risky, no matter which route you choose. For decades, some have said silver and gold are “safe” investments since their value will surely hold no matter what happens to the economy. Unfortunately, there is no 100 percent guaranteed safe investment. However, you may find it a less risky investment than other commodities.

Tip

The main dangers of investing in silver are that you could physically lose items like silver coins and bars and that the value can decline with changes in the market.

Silver Risk Factors

The value of silver comes from its demand. When industries need silver for production, it becomes a hot commodity. However, if industries tend to be relying on other materials, silver’s value will drop. The misconception is that silver isn’t influenced by market conditions, when it’s as vulnerable as many other assets.

One of the biggest dangers of silver is that price fluctuations can be less predictable than other commodities. Global demand for silver can influence its value, and if your portfolio includes silver, you may not be as easily able to predict what’s happening, especially outside of your own country. This can lead to surprise losses.

Investing in Silver

When you ask if investing in silver is a good idea, often the answer depends on how silver is performing at the time. Working in silver’s favor is the fact that it has a store of value based on the fact that there’s a limited supply of it in the world. As with anything finite, having silver on hand can pay off down the road, when it’s in demand.

However, there are a lot of questions investors have when getting started. Questions like, “Which country has the best silver?” highlight just how much there is to learn before you put a dime into it. The silver market has been very volatile in recent years, so it’s important you know that going in and adjust your strategy to compensate for it.

Types of Silver Investments

When you think of silver investment, you probably picture coins, but there are two major ways to invest in silver. One is to purchase actual silver, whether in the form of sovereign coins, silver bullion or minted bars. You can buy silver American Eagle coins online at prices starting at $17 as of January 2019, but you can also find silver bullion in bar form.

Instead of buying silver in the form of coins or bars, you can invest in it through exchange-traded funds. It’s easy to purchase ETFs as investments, and you don’t have to store any physical items. The disadvantage to investing this way, though, is that your investment is through the financial system. If you’re trying to reduce your reliance on the U.S. economy, that won’t help you.

Risk of Physical Loss

In addition to fluctuating prices, you put yourself at risk in other ways if you purchase silver coins or bars. While this takes you outside of the financial system, you’ll still be affected if the economy tanks and silver’s value drops. As with other types of investments, you’ll be less affected if you have plenty of years to enjoy long-term gains.

Of course, perhaps the biggest risk with having your money in a physical product is that you could lose or damage it. If your home is affected by a natural disaster, that investment could be wiped away in a matter of minutes. You can minimize that risk by placing your silver and any other asset-based investments in a safe deposit box.

What Is Hedging?

Silver is used as something called a “hedge,” which essentially means a way to safeguard yourself as you’re investing. You may feel vulnerable as you look at your portfolio, especially if experts are predicting a downturn. Hedging can be a form of insurance against the risk you feel you’re taking with the other items in your portfolio.

You’ll see hedging as a strategy used by professional brokers as they help you build your portfolio. They’ll look at safer investments to offset the high-risk items they choose. The theory is that, if things go wrong, you’ll have some items in your portfolio that may be gaining or holding their value to help reduce your losses.

Gold Versus Silver Investment

If you’re weighing silver against gold as an investment strategy, it’s important to note that silver tends to fluctuate in price more than gold. Metal-based commodities are based on demand, so you’ll likely find that the value of your investment relies heavily on international demand over the years. Gold tends to be less affected by supply and demand than other commodities since it holds a sentimental value that other metals don’t.

However, even with gold’s traditionally higher value, it’s important to consider the many innovations today that rely on silver. Batteries, superconductors and microcircuits all need silver, so technology’s continued takeover will keep values high. Silver is also used in many appliances and medical products, so it will always be an important commodity.

Price of Silver Versus Gold

One factor that drives many investors toward silver versus gold is its much lower price per ounce. Even though prices fluctuate, gold ranges in the hundreds of dollars per ounce, while silver doesn’t even approach $100. The interesting thing is that there is much more gold above ground than silver, yet still its value remains significantly higher.

One way to determine if it’s worth the investment is to look at how gold has performed in recent years compared to silver. You can then calculate whether your per-dollar investment will pay the best dividends, no matter how much you put in initially. You can easily find resellers who will buy your gold and silver, so you don’t have to worry about being stuck with either, making both good investments in that sense.

Silver Scrap’s Effect

In recent years, something called “silver scrap” has had an influence on the going rates for silver. Photographic film once relied heavily on silver due to the fact that it was so light sensitive. As photography has shifted to digital, though, the demand for silver has decreased, as well.

An unfortunate side effect of this shift is that there has been a stockpile of silver as people have recycled old film. This scrap provided a large backlog of silver that could be sold and used in other products. Over time, though, this stockpile has begun to deplete at going market rates, which could help drive the prices back up again.

Investing in Silver Mining Stocks

Another way to put your money into silver is to invest in silver mining stocks. Publicly-traded silver mining companies are located across the globe and can help you make a profit. As silver prices rise and fall, you’ll see your stocks in mining companies follow those trends. However, events such as an accident may affect a mining company even when silver is performing well.

Another option is to invest in something called a silver streaming company. A streaming company doesn’t directly deal in mining steel but instead offers financing to them in exchange for shares. These streaming companies are also affected by fluctuations in silver prices, but their ability to keep a steady stream of financing deals can also affect their stocks.

International Silver Prices

If you’re planning to invest in silver, one way to maximize your return is to take a look at the international silver market. Which country has the best silver? You may be surprised to learn that the U.S. ranks lower among the countries that produce the most silver, meaning you may be able to find a better investment in one of the countries that produce the most?

When asking, “Which country has the best silver?” you’ll likely find Mexico among the top, as it is the top silver-producing countries in the world, with 5,600 metric tonnes produced in 2017. Peru, China and Russia fall close behind. It’s important to note that Mexico is expected to increase its silver production even further in the coming years.

Silver as a Safe Haven

Despite the subtle dangers of silver, it’s popular with investors, especially during tough times. This puts it in the category of a safe haven, which is defined as an investment that is expected to hold its value as the market turns turbulent. However, no safe haven is guaranteed in every market, which means it’s important to research silver before putting money into it.

Due to its slightly safer nature, though, some investors choose to make silver a part of a larger portfolio. Although you won’t earn interest on that part of your portfolio over the years, it can be useful as a hedge against inflation. The fact that they tend to do better when other stocks are failing can help balance out your portfolio.

Safe Haven Alternatives

Before putting your money into silver, it’s important to be aware of the other safe options for your money. Probably the safest place where you’ll still enjoy returns is a Certificate of Deposit. If you leave the money in for the full term, you can earn up to 3 percent interest depending on the rate offered by your lender of choice. You can lose the interest you’ve earned if you withdraw the funds early, but you’ll always have the original money you put in.

Money markets are also considered safe havens, although interest rates generally are lower than with CDs. The benefit, though, is that you’ll be able to access your money if you need it. Money market mutual funds can bring a higher interest yield, but interest rates can vary throughout the life of your investment.

Government and municipal bonds may also provide relatively safe investment opportunities. Government bonds are thought to be among the safest investments because the money is backed by the U.S. government, but that won’t safeguard you against changes in interest rates. Municipal bonds, on the other hand, have a larger risk in that the issuer could default, so if, say, a city files bankruptcy, you may end up losing out on any future interest you would have earned, although you’ll get your money back.

Saving for a Disaster

One of the biggest draws to metals as a risk-averse investment has to do with protection against a market crash. The thinking is that even if cash has no value, silver and gold will, so you can always trade it for goods. This, of course, only works if your investment is in silver coins or bars that you keep in a safe place. If you’ve invested in silver mining stocks or ETFs, they will be affected by the stock market crash, as well.

Many still invest in silver and gold stocks, though, with the logic that metals tend to fare well during stock market crashes. While this has historically been true of gold, that same improved performance doesn’t apply to silver. Silver is used heavily in industrial sectors, which makes it more likely to be tied to the performance of the greater economy.

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About the Author

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.


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