Why buy Silver? | Introduction to Silver Investing
Introductory discussion on silver investing. How it can be used in your portfolio, the reasons to invest in it, and how to gain exposure etc.
Hello ladies and gentleman welcome to the Elias Talks money v-log where I talk all things money. Today we're going to be talking about investing in silver. How is can be used in your portfolio, the reasons to invest in it, and how to gain exposure to it.
Silver like gold is seen generally as a store of value, and is considered the sister metal to gold. This leads to people wanting to invest in silver as protection to inflation, and expansionary monetary policy where the government is printing money like they are today.
Silver though is much more volatile than gold because the market is much smaller. The gold market is estimated to be over 10 trillion USD versus about 44 billion USD for silver. Therefore it takes a smaller amount of money to have a greater impact on price.
Note if we were to look at things from an ounce standpoint probably silver produced is more than gold. Per ounce silver is currently approximately around $17, and gold is around $1,700, or about 100x more valuable. This also makes it more expensive to relatively store. Roughly 12% of gold goes into industrial use while about 56% of silver does.
Examples of things that silver is used for include: electronics, batteries, and also medicine due to it's antibacterial properties. Hence the economy can have a greater impact on the price of silver versus gold, and it's price is equally driven by industrial demand as it is for other reasons like people using for a store of value.
That being said a slow economy doesn't necessarily mean that silver will do terribly. During the 1970s recession silver performed very well. It should be noted though this was a period of stagflation, which means there was both inflation and high unemployment.
Silver as it protects against inflation did quite well rising over 3,105% over the decade. An environment that it would probably perform poorly is when there is deflation, and recession. Given the nature of the fiat monetary system though it's hard to imagine this happening as often as it did in prior centuries.
In 1971 the US moved off the gold standard, and since then we've only had one brief deflationary period during the 2008 recession for a very short period of time. We're also experiencing a bit of that now when it comes to discretionary goods, but the price of goods that are essential have actually gone up (as in basic necessities).
Interest rate cycles can run decades and it is something that will be interesting to follow over the coming years.
So how does one gain exposure to the silver market. There are numerous ways, but I'll describe the top 3:
1. Buy Physical Silver - Silver bars or silver coins. Storage is a consideration when doing this, and you'll need to ensure that you have insurance. This is the most traditional and conservative way of owning silver, and would probably be considered least risky.
2. Purchase stock in silver mining companies or an exchange traded fund like SLV which track the price of silver. Note that silver mining stocks are going to be even more volatile than physical silver or the SLV. As a small change in the price of silver can have a outside impact on their profits.
Lets say for example the breakeven for a mining company is $14 per ounce. At $15.00 dollars per ounce they make $1 per ounce of profit. If the price of silver goes to $16 then their profits double to $2 and this fact can in theory lead to a doubling of the value of the company even though the percentage change in the price of silver is just 6.67%.
3. Speculate in the commodity futures market. i.e. To Buy or sell options on futures contracts based on the direction of prices that you believe silver prices will go. This is the most risky way of playing the silver market, but also the one with the greatest potential pay off.
Each contract represents 5,000 troy ounces of silver. So for example if I am bullish on silver I can generally employ one of two option strategies. Say silver is currently trading at around $18. I can either sell put options below $18 and collect a premium, anticipating prices will go up and the option won't be triggered.
Or on the other hand I could also buy call options above $18 in anticipation that the price goes above that price in which case I could buy at a discount. There are more complicated options positions one could take, but that's something for another video.
The reason why I say it has the greatest potential payoff is that this strategy utilizes leverage, and therefore the potential pay offs as well as losses can be will be relatively larger than just owning silver. Note there are also ETFs that also utilize leverage like the USLV.
In conclusion, silver is investable as a store of store value, and protection against inflation. Relative to gold though it is more impacted by economic cycles due to it's industrial usage. It's price is also much more volatile than gold, because it's market is much smaller.
As far as gaining exposure the safest way is to buy physical gold or to purchase a non-leveraged ETF backed by silver bars followed by purchasing stock in silver mining companies, and then speculating in silver futures contracts.
That's all for today. If you enjoyed my video please like and subscribe to the Elias Talks Money YouTube channel or follow me on the Elias Talks Money Facebook Page. Keep your feet on the ground and your head in the sky over and out.