Silver as a Store of Wealth

Silver’s use as a precious metal goes back thousands of years, and first caught on around 3000 BCE, when an effective process was first put into place to separate silver from ores containing both silver and lead.

While silver’s usefulness apart from holding it for investment purposes has always been prominent, and this remains the case today, with silver having a great many industrial uses, it has also been prized for its own sake, in jewelry, coins, and in bulk.

For almost all the period that coins have been struck, from their first striking around 600 BCE to recent years, silver has dominated the coin market, with gold coming in a distant second. The lower relative value of silver made it more suitable for coinage, offering the advantage of both smaller denominations and a smaller percentage of the coin’s value being required as raw material for their minting.

As technology improved, this allowed for silver mining to really become ramped up, although the supply never got to the point where the market was flooded and prices crashed. This is due to the continuing demand for silver remaining quite high through the ages.

The silver industry is what drove the widespread Spanish exploration of the New World, and billions of ounces of silver were brought back to Spain over the years as a result. The silver from the New World ended up accounting for almost 90% of the world’s production from 1500 to 1800 CE.

Governments at one time held large silver reserves, due to its value as a store of wealth, as well as a means to back its paper currency. The United States started out on the silver standard, with its money being completely backed by silver, and only went to the gold standard many years later.

Governments no longer hold silver for these purposes, although they do still hold quite a bit of gold, as gold for various reasons has completely taken over as the preferred precious metal for wealth storing purposes anyway.

Silver has historically been used quite successfully as a store of wealth, although in more recent times, we need to ask if this is even a good idea anymore.

Should Individual Investors Still Consider Silver For Wealth Storing Purposes?

It has been fairly customary throughout the years for many investors to hold silver. This strategy has really waned recently though, and using gold for this purpose has become even more popular, due to the greater stability of gold. We may even seriously question whether it’s a good idea to use gold for this purpose anymore, and we need to especially question whether silver is now suited to this.

The smaller silver market is simply subject to more manipulation, and we especially saw this when the Hunt Brothers tried to corner the silver market by taking massive positions, massive to the silver market that is but not really that massive overall.

The amount of money needed to seriously affect the silver market is said to only be in the neighborhood of $10 billion, an amount that the richest investors could probably manage quite well, and one that investment banks certainly can.

The idea here is to buy up large amounts such that the demand for silver would increase due to the smaller float that would result, and whether or not this would ever make any sense economically, it is a concern.

Investment banks also take massive short positions in silver at times, which at the very least can drive down the price very significantly, and those who are in need of liquidating their positions can find themselves in trouble from any big decline in the value of the precious metal.

It is considerably more difficult to manipulate the gold market, on the other hand, due to its sheer size, and while gold can fluctuate pretty widely, and can also see some very long periods of depressed prices, investors simply have more confidence in gold being more stable.

As it turns out, these concerns aren’t really as valid as many people think, and institutional investors don’t really have that much of a problem with silver over reasonable periods at least. It’s really all about what we may expect value wise over a period of time, although silver doesn’t really accumulate wealth reliably over time like stock investments do, and their value as wealth storage is even more dependent upon the market.

Whenever we consider investing in something as a store of wealth, we are well served to start by looking at what a particular strategy may have yielded in the past, and while past performance does not predict future performance with any certainty, there are no certainties in investing and past performance can yield far better insights into the future than not bothering to look at all.

When we look at these charts, and for the purposes of wealth building we need to be looking at long term charts since this corresponds to the desired holding period, we can see that using silver for this purpose does have its time and place, but isn’t something that should be used indiscriminately.

Precious Metals Aren’t Really Stable at All

Many investors seek out precious metal investments like gold and silver to add stability to their portfolios. There are several reasons why one may want to add these investments, but stability isn’t really one of them.

If one seeks stability, then they should be instead looking at bonds, where one can both lock in the principal as well as a fixed rate of interest over a desired period of time. While bonds are subject to market fluctuations, being subject to them is optional insofar as one can simply hold them to maturity and receive the yield that they were promised, as long as the bond does not default.

Bonds are of course a store of wealth, and a very popular one, the most popular actually as far as securities go. Most securities are, by their nature, not so stable, the stock market for instance, as well as the precious metals market, including silver, and especially silver.

Silver isn’t really suited at all for long term wealth storage, and this is usually what we mean by wealth storage, investments that can be held for long periods of time, such as 30 years or longer, and be added to as desired to achieve further wealth storage.

What many people do though is to look to offset risks to a degree with different unstable asset classes, such as holding both stocks and precious metals. This can be done successfully, as the two are considerably inversely related, but both are affected by external factors that may change this relationship at times.

Hedging or speculating aren’t really part of wealth storage though, so while one may hold silver for either of these purposes, and under the right plan profit from it, it is important to realize what the real objectives are with these strategies, and this does not really include long term wealth storage.

This is due to the instability of the price of silver, which is the case with all precious metals as well, and therefore one should not ever just seek to invest in it with the expectation that it will accumulate in value over time.

It may or may not, depending on the timing of the investment and the performance of silver over the desired holding period, but this takes us into the realm of speculation, and all silver investments are ultimately speculative, whether or not we take this into account.

The Only Sensible Way To Hold Silver Investments

When we understand that silver investments are purely speculative, and are not stable stores of wealth, we can then apply this perspective to our using this as an investment where we can at least put ourselves in a position to succeed.

The price of silver, like many things, does move in distinguishable patterns, in both the short and long term. Those who are seeking wealth building will want to focus on longer term trends, where the price of silver trends in one direction or another for a period of years.

The trends in gold tend to last longer, where we can see a trend last 30 years or longer, although with silver the major trends tend to be of lesser duration, lasting about 10 years on average.

If you had the chance to buy silver around the turn of the 21st century, as Bill Gates and Warren Buffet did, where the price was around $6 an ounce, and you held it for exactly 10 years, at which point it was in a distinct downtrend after rising for most of this time, you would have quintupled your investment, adjusted for inflation.

It was felt at the time that silver was undervalued, just as it was felt that 10 years later it was overvalued, and 5 years later, its price had dropped by more than half. Investors who bought it then many have to wait many years more, perhaps even several decades, for silver to rise back up to being over $40 an ounce again net of inflation, and it’s possible that this won’t even happen in their lifetimes.

So it does bear paying attention to the overall direction of an investment prior to investing, and we also should be looking at charts with inflation taken out, in order to get a truer picture of price performance. The simpler you can make this analysis, the better, and inflation just adds an extraneous variable to the charts that we don’t need or should not want.

It’s not difficult to see that silver investment can have its place, and can be a real source of wealth building under the right circumstances, and one can play the other side of the market as well and profit by declines in the silver market, even in the long term, by investing in inverse silver ETFs for instance.

This does not mean that we can gain access to a crystal ball and see the future with our silver investments, and many investments do not succeed, and the best you can do with speculative ones is buy and sell something with the odds in your favor. It’s better to ensure that they are though rather than just invest blindly with no regard to the odds at all.