Silver vs. Stocks

One of the most distinguishing features between investing in silver and putting your money in the stock market is the fact that these two types of investments tend to run counter to one another, which can be a big advantage at times.

This is not always the case though, and we can’t just move to something like silver or other precious metals such as gold just because the stock market isn’t doing that well. There are other factors as well that drive precious metal markets such as silver, and we always want to be aware of what’s going on in any market prior to committing to it.

Silver vs. StocksStocks tend to do well long term though, and one can successfully ride out any pullbacks, even major ones, and still achieve at least a respectable long term return, or at least that’s the way things have played out in the past with stocks.

Whether this continues indefinitely is another story, although we can say that silver has not demonstrated this tendency to increase in value significantly over the long term, and is far better suited to medium to short term investment time frames.

People also feel that an investment like silver is more resilient to huge pullbacks, where they may think that the stock market may crash but silver, given its intrinsic value, will leave us more protected against such things, but this is not the case at all.

The stock market crash of 1929-1932 saw the market experience the biggest decline ever, producing a decline in value overall of about 75%, and although we’ve instituted measures to prevent such big declines since then, we can sometimes see stock indexes lose half their value or so during a pullback.

With silver, pullbacks of this magnitude occur even more frequently and can also be even more violent. It is a mistake to think that silver investing offers less risk than stocks, and silver is actually considerably more risky in fact. Silver does have an intrinsic value, but that value is pretty low, and while this may help the price of silver from falling to zero, by the time investors get there, this will involve big losses and losses that should have been prevented by selling the silver far before this.

Managing Risk with Silver and Stocks

The right way to manage risk with any investment is actually to define the risk that you want to take and hold the investment as long as this isn’t violated, and liquidate it when this level of risk is reached.

We do need to account for how volatile an investment is in order to assess the chances of this happening, although few investments are more volatile than silver, and looking to escape this would therefore not be a reason to want to invest in it. However, if we can manage this increased volatility, as we can with silver, then this doesn’t really become much of an issue.

We can do the same thing with investments in stocks as well, but the nature of investing in silver will require that we pay more attention to managing it. It isn’t just the added volatility that drives this need, it is also silver’s tendency to not accumulate in value very much over time, meaning that timing silver investments is going to be even more important.

We could even say that this is of utmost importance with silver, and unmanaged silver investments, relying merely on luck or hope, are going to have way too high of a potential to not end well, especially if we are chasing silver prices and may enter after a significant run up.

Since silver follows the principal of reversion to the mean over the long term, this will mean that if the price is up, it’s more likely that you will lose on the investment than not over time. In order to look to escape this fate, we’re going to need to manage our holding effectively, staying in while the going is still good and getting out when this turns the wrong way enough.

Stocks do revert to the mean somewhat in the shorter term, but over time, the trend is upward, which allows investors to get away with not managing their investments at all. While we may shoot for higher to much higher returns by managing our stock investments, not doing so has just meant that our average returns will be lesser, but still may be positive.

With silver, not managing things may provide us a negative expectancy, which doesn’t mean that a particular silver investment will lose money, but that investment is likely to lose based upon probabilities, or at the very least will likely provide a return well inferior to alternative investments like stocks.

Managing risk involves looking to prevent excessive drawdowns and excessive losses, but if the investment itself with a certain approach has a negative expectation, then it actually does not make any sense to invest in it unless the goal is to lose money, which of course it never is with investing.

The bottom line with risk management in investing in silver versus investing in stocks is that silver investing will require that we actually pay attention to these investments and exercise discretion with them, and although we may think that this should always be the case with all investments, with silver you can’t get away with the completely hands off approach that so many stock investors use.

Investing in silver will therefore take more skill to not lose, although both investments and all investments certainly benefit from a higher level of skill being used in managing them.

Comparing Returns with Silver and Stocks

No matter how we look at it, stocks offer much more potential upside than silver or other precious metals do over time. The key here is the over time part, as over shorter periods of time such as a few years, silver can indeed outperform stocks, especially if stocks are in the midst of a bear market.

If we look at the last 30 years, silver prices are trading at about the same level as they did then, net of inflation, and the stock market has increased about 500% since then net of inflation. We can go back 100 years, and silver is once again trading where it did back then, where stocks have seen their value increase more than 10 fold.

Over the last 10 years, the value of silver actually decreased by about 20%, while stocks have risen about 250%. Over the last 5 years, silver prices have decreased even more, while stocks have moved up very nicely in the middle of the current bull market.

On the other hand, during the 10 year period between 1972-1982, stocks dropped over half their value, while silver tripled in value in price. During the big selloff of 2007-2008, both dropped a lot of value, but silver came back better over the next couple of years, even though both delivered very well during this rebound period.

Stocks therefore deliver returns well superior to what silver does, most of the time, with notable exceptions. These exceptions do involve stock market pullbacks of some degree, and generally speaking, when stocks are doing poorly we do want to be invested in something else, although we also need to look at how well silver is performing in order to decide whether this is a better option or not.

Timing Silver and Stock Investments

Another distinguishing feature of silver versus stocks is the speed of advancing and declining prices with silver, which does have a tendency to spike more than stocks do, especially at times where the price of silver really goes up. We see bigger spikes with silver and we also see more violent reversals than we do with stocks.

This is another reason, and perhaps the biggest one, why silver investors have to be nimble, and a lot more so than stock investors do. Silver can double in price in a single year, and give it all back the next year and then some in some instances.

Investors who take a passive approach to silver investing can end up missing out on the whole move and worse, and while it’s not always easy to get a big piece of a move this quick, we will never capture any of it we don’t even attempt to.

Up until cybercurrencies came on the scene, silver was the most volatile investment out there, and while cybercurrencies have redefined high volatility by orders of magnitude, silver is still plenty volatile compared to stocks in general.

Volatility increases both potential returns and risk, and in turn requires greater skill to manage both, to get out when silver is moving too much against you and stay in when things are in your favor. Deciding when to enter and exit is therefore at more of a premium with silver, and we can’t just enter and exit at random points in time and expect to do well or even expect to make much money at all.

Based upon historical performance, which all investments are based upon, the expected return of a random silver investment would be just to cover inflation, and we can get the same expectation from investing in the highest quality bonds, risk free instead of the accelerated risk of silver investing.

With such a risk to return profile, we may wonder why anyone invests in silver at all, especially physical silver, which is also a very expensive way to do it due to the big spreads and other associated costs.

Physical silver may not be the best invest in silver in a lot of cases, but under the right guidance, trading in silver based securities certainly can be, especially with those which offer the ability to bet on the price of silver going down as well as up, such as silver ETFs do.

The right guidance here means timing our silver investments properly, and while there are some real skills involved here, where the more skill you employ, the better you will do, even a modest amount of skill at the right time can be benefited from.

If the stock market is doing well, in a bull market in other words, investing in stocks is clearly superior, and even if silver is advancing as well, when you account for the added risk of silver giving this back quickly, stocks will win out.

When stocks are not doing so well, there are occasions where moving to something like silver can clearly be beneficial in the right hands, where we’re looking to be in silver at times where it is going up and stocks are going the other way.

It is not all that difficult to tell these things, even though a lot of people want us to think that this is all random or well beyond human knowledge. We don’t really need a crystal ball or a supercomputer to be able to distinguish bear and bull markets really, and if stocks show bear and silver shows bull, it pays to go with what is performing better, even at a glance.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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