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Investing in Silver

I suppose another title for this post could be Silver: The Poor Man’s Gold.  Overall, commodity investing is frankly speaking the only type of investment (together with real-estate) which is so called “tangible”.  How is that different from buying a company on the stock market?  Truth be told, a commodity is something you can touch – something which mother earth has produced and something which may not be re-produced that quickly.  When you are buying a company, you are only buying 2 things:

  • the company’s real estate (i.e. office / storage space)
  • the company’s productivity

We all know how the first one did over the last 2 years or so and we definitely know that the company’s output measure can be (and is) frequently manipulated for different accounting purposes.  But this article is about silver – a precious metal which not only has the “bling” effect but is also commonly used in different industrial applications – and, first and foremost, it happens to be something which you can actually touch and hold in your hands:  it is a tangible asset.

The Silver Standard

Back in the days when the world was not a stock-market economy but a tangible-assets economy, most of the world’s governments used silver or gold coins as valid tenders.  In the US, the Silver Standard was started in 1785 – even though it was not a strict Silver Standard as the laws of the time did not require the US government to hold physical silver in its coffers in order to use it as backing for the US dollar – so in essence it was more of a derivative.  The silver standard was in use up until 1873 when the US crossed over from the silver standard to the gold standard, effectively backing the US dollar with the amount of gold it had stored rather than silver.  Ultimately, the gold standard and by consequence an indirect backing of the US dollar to the silver amounts effectively ended when president Nixon dropped the gold standard in 1971 thus decoupling the US dollar amount that could be printed from any association with gold in the US government’s coffers – and by consequence and indirect relationship of the US dollar to silver.  This was due to inflation because of the Vietnam War as well as due to France (led at the time by Charles de Gaulle) to drop the US dollar and accumulate gold, effectively decreasing the US influence abroad (as after WWII, the world’s currencies were directly measured against the US dollar which was supposed to be backed by physical gold at the price of $35/ounce).

Silver as an investment

Historically speaking, silver has always kept a 16:1 ratio together with gold – i.e. 16 ounces of silver would in general get you 1 ounce of gold.  That ratio however has experienced significant shifts as you can see from this historical ratio chart:

and currently, it is seating at approximately 38.5:1.  Also, an interesting concept to note is that the ratio has always experienced significant shifts during or around uncertain times:

  • 1940 – WWII
  • 1990 – Recession / Desert Storm (or thereabouts)
  • 2009 – Recession

Interestingly enough, whenever gold seems to be rising, silver also tends to rise – and hence the term that silver is the poor man’s gold.  In times of uncertainty, the world tends to buy gold as a safe haven – this pushes the demand up and by consequence the price up – silver follows.  Just take a look at the price of silver in 2009 vs now:  $14.67 / ounce vs $39.22 / ounce.

Some gold pundits say that gold is still highly undervalued – mostly due to the fact that economically viable supplies of gold are quickly depleting thus pushing its price up in order to make smaller deposits economically viable.  Add to that the fact that there is a massively huge disproportion between the US dollars printed and the price of gold – and you have gold rising to somewhere in the area of $2500 – $3000USD / ounce.  This would surely push silver to about $65 – $78 USD / ounce (if we keep the 38:1 ratio). It is my prediction that this might happen within the next next 2-3 years.  Interestingly enough some “gold-bugs” predict that gold might soar north of $6000USD – I might have a bit of a hard time believing that, but stranger things have happened.  I would also wait a little bit for silver to drop down in price a bit as there will be a correction coming.

How to invest in Silver

I think that there is nothing better than holding hard bullion in your hands.  In order to get your hands on some silver, I never recommend you go to a bank.  I don’t like banks to begin with but on top of that they will probably slap some fee on what you are buying.  If you decide to purchase some silver, I recommend you get it from Kitco Inc – a Montreal, Canada based company dedicated to buying and selling silver from / to the public.  You can get silver bars or silver coins – I recommend silver coins – for no particular reason – just my preference.  If you visit Kitco, you will see all the other options they offer.

If you feel like you have however some money to almost-gamble, I would also recommend you take a look at some Silver producer companies and purchase some of their stock.  Generally, these companies’ stock trades at a premium when the silver price climbs.  A good one to follow is Goldcorp Inc. (TSX: G) – they were the 15th largest silver producer in the world as of 2009.  The added bonus to Goldcorp Inc. is that they are also one of the largest gold producers therefore whether silver goes up, gold goes up (or what is bound to happen – both go up), you should be a happy camper.

As alway, anything and everything which I write in this post is my own personal opinion – if you lose money on anything I am writing – your fault; not mine as this is your money you are putting down.




About Michael W.

Project Manager for a large financial services company. Non-denominational closet investor. Entrepreneur running a small shop with a big idea


2 thoughts on “Investing in Silver

  1. Very interesting post and cool idea this blog.I look here sometimes, but I do not understand all. Is posiibilyty learn .
    Good luck Mike.

    Posted by Mariola Saternus | May 25, 2011, 01:09

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