Last Updated on October 25, 2024
[Disclaimer: I own physical silver and silver stocks. This is not investment advice and is provided for information only. This considers the economic case for silver and is not a recommendation to buy. Do your own research and consult a financial advisor.]
The key arguments in favour of buying silver are:
- Silver is a hedge against inflation
- Silver allows you to remove wealth from the banking system
- Silver is hard money for small transactions
- Silver is cheap
- Silver has no counterparty risk
- Silver is a great speculation
- Silver is an industrial metal
- Silver has a low risk of confiscation
Silver is historic money that has been a mean of exchange for thousands of years.
For much of human history silver and gold operated as monetary metals in tandem. Gold was more valuable and used for larger transactions, while silver was less valuable and used as the day to day money of the common man.
Silver lost its official status as a monetary metal in much of the Western world in the 1870s with the emergence of the gold standard, although it remained the monetary standard in China until well into the 20th century.
Yet silver despite no longer being formally recognised as money by any government, silver is still very much a monetary metal.
While it also has industrial uses, silver has a place alongside gold in the portfolio of someone looking to protect themselves against the debasement of fiat currencies.
8 Reasons To Buy Silver
1. Silver Is A Hedge Against Inflation
Silver is not quite the pure play monetary metal hedge against inflation that gold is.
It is less scarce, has a lower stock to flow ratio and its price also behaves as an industrial metal.
This means its price is more volatile and it can be prone to deep and prolonged bear markets.
Nevertheless, since the fiat era began in 1971, silver has largely traded within an upward sloping parallel channel.
Since 1971 there have been two massive price spikes outside of the channel and one brutal bear market below the channel. But the trend is clear.
And since the bear market ended in the early 2000s, the slope of the channel has increased significantly.
Now you could lose a lot of money getting your timing wrong within that channel and you would want to make sure you bought the bottom of the range.
But on a multi-decade timeframe the trajectory for silver is clear. As fiat currencies debase the nominal price of silver will rise.
Therefore, silver can act as financial insurance and a store of value over the long haul, albeit with a lot of volatility along the way.
2. Silver Allows You To Remove Wealth From The Banking System
When you deposit money in the bank you no longer technically own it.
Technically speaking you have just made an unsecured loan to the bank.
As long as your bank and the banking system as a whole is solvent, then there is no problem. You can withdraw your money and recall your loan at any time.
But if the banking system as a whole or your particular bank ever came under financial stress, it might not be quite as easy to get your deposit back.
For that reason, storing some wealth outside of the banking system in the form of a monetary metal could be a wise choice.
3. Silver Is Hard Money For Small Transactions
One of the key problems for gold as money is that it is too valuable.
You aren’t going to use a 1 oz coin to buy your groceries or fill up your car with gas.
However, silver is perfect for that type of transaction. For thousands of years silver coins were the medium of choice for the day to day transactions of the masses.
These days people who like to store wealth in precious metals often choose a mixture of both silver and gold.
The idea being that if you wanted to spend your precious metals in a currency collapse scenario silver would be a far more practical choice.
4. Silver Is Cheap
One of the difficulties with buying gold is that you need a significant lump sum of money to buy an ounce.
Sure, you can buy fractions of an ounce but these often command a higher premium.
You can also buy unallocated gold from some dealers or buy an ETF that tracks the price of gold. But these are sub optimal if you want the hard asset in your hand.
This is where the cheapness of silver is an advantage. You can regularly dollar cost average into physical silver with small sums of money because the price of entry is cheap.
5. Silver Has No Counterparty Risk
Counterparty risk is when you require some other entity to remain solvent in order for your asset to retain its value.
Bank deposits, physical cash, bonds and stocks all have counterparty risk.
While the risk is always remote banks can fail, governments can fall and company stock can go to zero.
Silver does not rely on any counterparty to retain its value and will always retain some value regardless of the financial circumstances.
6. Silver Is A Great Speculation
The beauty of gold as a precious metal is that it is a very good wealth preserver. It doesn’t go up by that much but it doesn’t go down by that much either.
In contrast, silver is extremely volatile. As a speculation it is far superior to gold.
It can drop in price very quickly. But it can also rapidly spike up in price.
But volatility can be your friend if you buy low and sell high.
In the post-1971 fiat era, silver has had two massive price spikes and several smaller but still significant moves.
When the stars align in the silver market and you get your timing right, you can make a lot of money.
7. Silver Is An Industrial Metal
Gold has jewellery demand and monetary demand but very little industrial demand.
Silver, on the other hand, has all three.
And its industrial utility is only growing more and more.
This industrial use complicates silver’s price action. Sometimes it behaves like a monetary metal and sometimes it behaves like an industrial metal.
For example in an economic slowdown silver should fall as industrial activity slows down. But if that economic slowdown results in money printing then silver should rise as it acts like hard money.
This industrial and monetary use increases silver’s volatility, which can be an aid to speculation.
8. Silver Has A Low Risk Of Confiscation
FDR’s 1933 confiscation of gold looms large in the minds of many precious metals holders.
Many people wonder whether it might happen again and whether holding gold is a risk in that regard.
Personally, I’m in the camp that gold confiscation is unlikely in the fiat era. The theory is that gold is no longer formally part of the monetary system and is only held as reserves. Therefore private ownership of gold is no hindrance to the government’s ability to debase the currency.
In 1933 gold was the monetary standard and in order to debase the dollar FDR had to lower the gold content of the dollar. In other words, he had to raise the dollar price of gold.
Therefore it made sense that the government would want to be the ones to hold the gold and the citizens to be the ones to hold the paper, when the devaluation happened.
This isn’t necessary when gold is no longer the monetary standard.
Nevertheless, gold confiscation is still a risk.
Silver confiscation, however, is even more remote. Not only is it not part of the monetary standard, it is not part of central bank reserves.
It seems highly unlikely that silver would ever be confiscated.
For this reason, it makes some sense to diversify a portion of your precious metal assets into silver.
Conclusion
Silver has a long history as money, primarily as a medium of exchange for day to day transactions.
Despite being officially demonetised it is still a monetary metal.
As fiat currencies are debased, silver will offer protection and financial insurance.
It will be much more volatile than gold, but if you play it right, that can be hugely beneficial to the performance of your portfolio.
Image Credits:
100 oz silver bar by Scottsdale Mint on Unsplash
1 oz silver coin by Zlataky on Unsplash
