We have gone over the numerous benefits of investing in gold, and today we would like to talk about its less popular cousin: silver. When it comes to precious metals investing, silver is often left in the metaphorical dust as investors rush toward other metals. These investors often have the same thought process, “Why invest in silver?”
That’s a good question, and in today’s article we will show you that while investing in a silver IRA carries many of the same benefits as investing in a gold IRA, there are subtle yet significant differences between the two that may mean that a silver IRA is more appropriate for particular investors.
First, let’s take a look at some of the common benefits that both gold and silver share.
Safe Haven Investment
Both gold and silver are safe haven investments that serve as a powerful hedge against inflation and currency depreciation. Not many people know that there was indeed a ‘silver standard’ equivalent to the ‘gold standard’; both metals also have a long historical basis of being used as a store of value. This is particularly important in today’s global economy, where the majority of all currencies run on a fiat money system (i.e. not backed up by any tangible commodity) and the money supply is constantly increasing. Further, with governments all around the world looking at eliminating cash, investments in safe haven physical commodities are more important than ever before.
Portfolio Diversification Mechanism
The concept behind portfolio diversification is to decrease the overall portfolio risk by composing a portfolio of investments that are loosely or negatively correlated with each other, resulting in a portfolio risk that is lower than the sum of its parts. As you can see by the below table, both metals are highly negatively correlated with the various stock market indices all over the world, making them both efficient and effective mechanisms for portfolio diversification.
Good Long Term Historical Returns
The table below shows the average annual returns for silver compared to the 5 main funds available under the Thrift Savings Plan program, which is a program available to the majority of federal employees. As the data shows, while results on the short-term show both gold and silver relatively under-performing, over the longer term 10 year period, silver outperforms them all. And keep in mind that this long term performance is achieved while at the same time being an effective hedge against negative price movements of the underlying assets of the other funds.
These benefits make silver an intelligent investment into an investor’s portfolio; now let’s take a look at how a silver IRA can offer different kinds of benefits compared to its rarer cousin.
Silver is Cheaper on a Per-Ounce Basis
Gold can range anywhere from 20 to 100 times the price of silver on a per-ounce basis, with the average for the entire 20th century being at the 47 times mark. And while this would be irrelevant if you could purchase the yellow metal and silver at spot prices, unfortunately this does not happen in reality; there is always a markup in there. According to most retailers, if you are investing $1,500 or less, then go for silver as you would be charged a relatively lower markup percentage wise.
Silver Prices are More Volatile
Another little known fact is that even though gold is the more popular of the two metals, silver is used on a much broader scale in industrial applications. If fact, 50% of silver’s demand comes from industrial applications (jewelry 28% and 20% as investments). Coupled with the fact that silver has a much smaller market in general, it becomes more clear why the price of silver has historically been volatile. Therefore, if you take the view that the price of safe-haven physical commodities are going to increase in general (perhaps due to a high degree of inflation), then investing in silver would most probably give you higher returns as compared to gold. Of course, investors should keep in mind that this works both ways as well…
Silver May be Presently Undervalued
As at 21st December 2016, the gold to silver ratio stands at around 70 times. Given that the 20th century historical average stood at 47 times, many analysts are predicting that the ratio should eventually trend downward toward its historical average. A fall in the ratio would of course mean a proportionally higher increase in the price of silver relative to the price of gold and hence make silver the better investment. However, potential investors should also keep in mind that this is by no means certain and other analysts have stated that in the 21st century, the gold to silver ratio will remain higher than the historical average.
Intelligent investors are allocating a certain percentage of their investment portfolio into safe haven physical commodities to serve as a hedge against inflation, currency depreciation, and to act as a store of value. These investments also create a more diversified and hence lower risk portfolio and have proven to deliver good long term returns.
Nevertheless, investors should be fully aware that while both gold and silver can deliver the above benefits, there are distinct differences between the two that might make silver more suitable for one investor over another. Higher volatility means potentially higher returns but also higher risk so risk tolerance should be taken into account. Silver may also be a more appropriate IRA investment for those who only have a small amount of funds to allocate for physical commodities.
We hope that this article has shed more light on why investors, when looking at safe haven commodities, should seriously consider a silver IRA as well. We appreciate you taking the time to read this and we are confident that you are now better able to make the right decisions for your own financial needs.
One of the easiest ways to get started protecting your future is with a precious metals IRA.
You can get started with our free Gold Investors Guide to learn more about the benefits of investing in gold & silver IRAs and other precious metals. Also, when you're ready to talk with advisors, see our list of top gold ira companies and get in touch with experts to set up the right investment vehicle for you.