Much attention has been given to gold lately, and rightfully so. The yellow metal is often an excellent proxy for inflation, and can be a strong indicator of investor sentiment. As investors become more risk averse, they look for “hard assets” that are likely to hold their value regardless of what happens to other asset classes. Unfortunately, there have been few places for risk-averse investors to park their money because the yield on traditional Treasury securities has been so low.
With gold making new highs, some investors (myself included) fear that a correction could quickly hurt some of the gains that gold traders have accumulated over the past few months. While I believe the secular trend for higher prices on hard assets will continue, volatility can knock a novice investor out of his position and eventually lead to losses despite this investor understanding the broad macro picture relatively well.
One possible alternative to owning gold today would be to diversify some capital into silver. While silver has many of the trading characteristics of gold in that it truly is a precious metal and can be a good storage of value, silver is also a commodity that is used in various industrial processes. Nearly every single ounce of gold that has been mined is now in circulation in the form of artifacts, jewelry, or bullion. There are precious few actual uses for gold besides just being a precious commodity.
On the other hand, silver is used in soldering materials, in technology applications, for its reflective capabilities, for its anti-bacterial qualities, and is still often part of the X-ray process. The vast majority of silver mined over the centuries has actually been used up or consumed. So with shrinking supply and demand potentially building, silver could see its price rise much more than gold on a percentage level.
Skeptical investors may point to the fact that silver is still below it’s historical peak as an indicator that silver will not participate in a secular bull market in precious metals (at least not to the extent that gold will). But in actuality, the volatility and potential investment gains in silver will likely dwarf the returns in gold.
Consider this… Using SLV and GLD as proxies (they have very small tracking error to the actual commodities and are easier to buy for most investment accounts), gold has rallied 66% from it’s lows late last year. However, SLV hit a low of $8.45 in the fourth quarter of 2008 and has since rallied to a current price near $18.40. This gain of 118% is sharply higher than the gain in Gold, and could be a strong indicator of which metal will likely outperform in coming quarters.
When fighting inflation, it is important to diversify into different asset classes in order to minimize risk. Gold is a well known vehicle, but silver should be considered an option as well. Investors should also look at agricultural commodities, and companies who would benefit from increasing agriculture pricing. Our recent article on Intrepid Potash (IPI) outlined the benefits of this strong fertilizer company.
Current government statistics would have us believe that the risk of inflation is very low. However, with interest rates still at emergency levels, government spending out of control, and currency flooding the market, inflation should be an important consideration for long-term investors. Silver could turn out to be an excellent storage of value and is worth considering for at least a portion of most investor’s portfolios.
FD: Author has a long position in SLV and GLD personally and in the ZachStocks Growth Model
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November 24th, 2009 at 11:23 am
Mr Scheidt
Thanks for your analysis but there is an increasing WARNING about BULLION ETFs see below
Morgan Stanley pays damages for Precious Metals Fraud
Written by Jeff Nielson Friday, 24 July 2009 11:26
Silver Wheaton The Safe Alternative to SLV
by: Jeff Nielson September 21, 2009 | about: SLV / SLW
What do you thing about ” gold and silver” prices manipulation through financial investment ( Bullion ETFs like GLD & SLV) has not really the gold and silver inventories they said that means some banks are creating ” gold/silver paper” like they created ” paper/fiat money”
I would appreciate a discussion on this important subject for small investors
November 24th, 2009 at 11:23 am
But silver crashed with stocks in 2008-09 while gold held up MUCH better. It could happen again.
November 24th, 2009 at 11:24 am
A good article that makes a good point and good comments also. I would use SLV and GLD only for tracking prices or a fast trade – not for any long term hold in a portfolio. There is too many questions about their transparency and actual holds of the metals instead of paper. I use CEF for a long term hold in my portfolios. They are clear and transparent with an outside audit company. They even pay a very small annual dividend instead of charging you to hold the PMs unlike some alternatives. They hold both Gold and Silver bullion in equal portions and re-balance when one gets too far ahead of the other. This means that I do not have to and saves on both commissions AND taxes. Think about it.
November 30th, 2009 at 2:15 pm
+
Had you bought Hecla (HL) last November, you would be up 491%.
had you
November 30th, 2009 at 2:15 pm
P. S. Hecla could go up another 268% to get back to it’s price last year. It would still be cheap for a company producing eleven million ounces plus per year.
November 30th, 2009 at 2:16 pm
I agree with indianamark. I bought HL near the end of september at $4.20 and I am currently up about 55% today.
November 30th, 2009 at 2:16 pm
The dow and gold will eventually be a 1:1 ratio. The biggest opportunity is silver as this article points out though. I have much more silver than gold in my portfolio. Foget the fact that silver is more voilatile- long term it will be extremely valuable and not just for a brief period. Check out bullion.tel if you want a way to get silver eagle bullion below spot value.
November 30th, 2009 at 2:17 pm
Ok article, except for your use of the probably fraudelant SLV and GLD ETFs. AND EVEN THE USE OF THESE FRAUDS FOR SHORT-TERM TRADING JUST SUPPORTS THE GOLD MANIPULATORS. Let’s get everyone out of these frauds into bullion or at least into the truly bullion backed ETFs and similar produces. Trust
KITCO, their pooled accounts ..? I don’t know. A European friend learned that his bank which he thought was holding gold was only holding paper
gold. Ask, if there is any doubt. Trusting any US or UK bank or financial institution is naive at best given the increasing revelations of the depth and breadth of deceit, fraud and outright theft. If we enter a world deflation, maybe silver will experience some slack in industrial demand but will that be more than made up by investor demand? I dont know. Any opinions out there about this????
November 30th, 2009 at 2:18 pm
GLD and SLV are good for day traders only. Doubtful they have any gold or silver, so dont get caught owning them when the music stops. Even hedge funds are leaving GLD for gold coin and bullion where they take possession.
Monex is great for coins and bars, but I recommend taking possession. In this day and age you cannot be cautious enough. CEF out of Canada for gold and silver is the only fund I know with Gold and Silver, and audited twice a year.
I am comfortable with them, and from many articles, they are highly recommended with 45 years or so in operation with no blemishes.
Extra fiat paper money is nice, but silver and especially gold is where you take your winnings off the table for long term gain and security from all the market and political manipulations and shenanigans.
November 30th, 2009 at 2:19 pm
Anyone who will take the time to actually research the fundamentals on silver will quickly wonder why it is so dang cheap. It is much much rarer than gold, much much more useful and needed in the modern world. The answer is that it is a tiny market and since it is one of the canary’s in the the money mine, the price has been held down using paper metal. Since the first law of economics states that the cure for low prices, is low prices, it is obvious that the market has not been setting the price for silver, but it will. One day soon, it will be revealed to one and all that silver is in a very serious shortage. When more than 1 in 1000 wake up to the realization that silver is a better investment than gold, the price will start shooting up. Then it will attract even more attention and all of a sudden industry will find that there is no silver for them at anything near today’s price. Then you will see silver prices going up $10/day, then $20/day. The next law to attend to states that for every action there is an equal and opposite reaction. Since the price has been too low, for too long, it will soon be too high. How High? It will easily top $500. It could top $1500.
November 30th, 2009 at 2:19 pm
Good article! Two things, however, I believe need to be said. First, PHYSICAL silver is the way to go as ETF’s are essentially paper silver and can cause you some SERIOUS grief, and second, since the silver market is a much smaller market (than gold) volatility is a real possibility. But, silver will be a terrific purchase for the future.
December 9th, 2009 at 6:59 pm
Zach,
Excellent posting. thank you for producing a relevant and sober analysis of investment opportunities in silver.
Regardless of silver’s upside opportunities, I wanted to quickly note that in addition to being a nice investment opportunity, getting silver dollars can also make nice Christmas gifts for younger brothers or cousins.
Thanks,
James
April 27th, 2010 at 3:03 pm
The motivation to buy gold is usually driven by the pursuit of some defensive monetary technique.
June 21st, 2011 at 3:51 am
There may be a bundle to find out about this. You made nice points also.