The Pros and Cons of Buying Silver

by James & Miel on July 12, 2009 · 1 comment


Hi All,

Its Sunday and we’re both still in Eugene, Oregon. On Friday my brother and I drove over to one of the local coin dealers where we picked up a couple of ounces of silver. We ended up buying a 1 ounce silver eagle and another 1 ounce silver bullion coin.

So, the reason I’m bringing this up is one of our readers emailed and asked us to write a little more about the ins and outs of buying silver. Here are a few points that are relevant if you are thinking of investing in this asset.

Reasons to get into silver.

1) Limited Hedge Against inflation. Precious metals like gold and silver can hedge against inflation. However, the relationship between real returns on these assets and inflation isn’t that great, at least according to the scientific articles I’ve read. For example, one article argued that silver hedged inflation only during the early 1930s and the late 1970s, other articles didn’t show a relationship at all. So, what this indicates is that silver can hedge inflation, but its effectiveness has limitations.

2) Diversification. Most of the time when you hear about diversification, its in the context of the stock market. Typically you’ll see something to the effect that you need to buy stocks in larger and smaller companies, and that you need to get positions in different industries, etc etc. Well, hard assets like gold and silver tend to have low correlations with other types of investments. So, if your 401k stocks are declining, the price of silver might increase.

3) Return. One great reason to invest in silver is the possibility of making some money. For example, my father in law bought a large batch of silver when the commodity was trading for less than 4 bucks an ounce. Recently the white metal has been trading for $12.65, which indicates a 200% return on my father in law’s investment. That is a significant increase, and if you really want to build wealth you will need to find these spots every once in a while to cash in on a serious gain.
(Example of chart showing spot price of silver).

4) Low Cost. Silver usually costs less than $20 bucks per ounce. Even if you don’t have a lot of money, you can often get some silver with what you’ve got in your pocket or by scraping up change lying around the house.

Here are some reasons NOT to do it.

1) Better alternatives. Silver and gold prices generally follow economic activity. So, when the economy is strong, these metals tend to do better. Like an inflation hedge, the relationship isn’t all that great, but it does exist. However, when the economy is doing well, other assets – stocks in particular – also do well. Silver compares unfavorably with stocks for other reasons. For example, stocks pay dividends and can split. Splits and dividends can lead to compounding. If you buy actual physical silver bullion, you won’t be able to take advantage of this. So, briefly put, stocks are often a better alternative to silver.

2) Hassles. Provided you are buying actual physical silver, taking possession and holding onto the metal can be a real pain. For example, if you have anything over oh, say, 100 ozs, you need someplace safe to store the stuff. This is usually a safe or a safety deposit box. The major problem here is that you need to incur the costs of the storage. Safes can be hundreds of dollars and deposit boxes can charge a healthy annual fee. Also, if you are buying the silver, you need to get in the car, or get on the subway, or whatever and actually go and make the transaction. Both storage and buying can be a hassle.

3) Freak Factor. The third reason not to buy silver is what I call the “freak factor”. A lot of people who are really heavily into owning gold and silver are conspiracy theorists. They believe the government is going to confiscate their bullion, that the federal reserve is a Jewish cabal that is out to control the world, etc. etc. etc. Plus, a lot of bullion dealers are pretty crusty people. They tend to be a bit suspicious of anyone who isn’t a 40 to 60 year old white Anglo-Saxon slightly overweight white guy. Do you really want to be associated with that crowd? I personally don’t mind so much, but its a legitimate question.

So, what should you think about when buying silver?

Assuming you want to buy actual physical silver…

1) Get something standard. There are a lot of private companies that have produced silver rounds. These vary in the quality and amount of bullion included. Instead, of getting these, consider Canadian Maple Leaf or American Eagle coins. These are produced by the Canadian and US Federal governments, so they are standard and a bit more universally recognizable than the private options. More importantly, they also have higher resale value.

2) Know the market. Silver trades on exchanges just like stocks. The value of silver at any on point in time is called the spot price. Don’t pay more than a couple of dollars over spot. A lot of dealers will try to jack you on price so know your market and shop around. Consider both local dealers and online sources like eBay.

If you want to get into silver, but don’t want to buy the actual metal…

1) Buy an exchange traded fund. A couple of popular ones are: SLV, DBS and AGQ. The investments indicated by DBS and AGQ track the index price of silver and may be a bit cheaper over the long run due to lowered expense ratios.

2) Consider a mining company. A lot of mining companies haul silver out of ground as a by product of their operations. Or the alternative is that you can buy shares directly in a mining company that focuses on extracting and producing silver.

3) Other alternatives. There are a TON of ways to invest in silver other than physically buying the metal or getting it indirectly via an exchange traded fund or a mine. These other options include spread betting and derivatives. We know almost nothing about these alternatives, so its best to check Wikipedia.

Finally if you want a read about a really hardcore silver mine, check out the story of the Bolovian Potosi mine. The Potosi mine singled handedly funded Spain’s ascension to world power in the 17th century and was responsible for the deaths of hundreds of thousands of indigenous persons. The mine is so deadly, it has an image of a devil like imp as its patron saint. Its very interesting story indeed.

Best,

James



{ 1 comment… read it below or add one }

1 Dean Perkins January 29, 2011 at 7:56 pm

James -

Informative article…

My daughter has about $40000 total mostly in mutual funds, but also in CD’s. A company named Southern Trust Metals Inc., will invest (on our call) 10000 (minus 4% ) and wil call to suggest when to sell again. They are a subsidiary of an LLC but little can be found on the internet about their silver buying and selling. Any suggestions? Thanks. Dean

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