Silver Has Long Been Associated With Money
The emergence of silver as money took us out of the barter age and into the age of what we understand today as money, goods which hold denominational value beyond their intrinsic worth. Prior to silver, goods were exchanged in transactions that had certain uses, until the use of coins became popular, in order to make these trades more flexible.
So if you traded coins for something, these coins could be exchanged by the other party for another good that one desired, and this allowed for universal exchange, where with barter trades you had to want what the other party had to offer on their side of the exchange.
Silver has played a prominent role in money since money’s very early days, and in many languages, silver and money are the same word. Silver coins date back to around 650 BC. While silver is rare enough to be considered a precious metal, a requirement for use as money, it is not as rare as gold, so while gold has been used as coins for about as long as silver has, the lower value of silver has lent itself better to the wider circulation that money has required over the centuries.
Up until the Civil War, the U.S. Dollar used to be backed by silver, which was later replaced by the gold standard. Many countries have used the silver standard over the years, where one could exchange paper money for physical silver. The British Pound gets its name for its one time equivalence to a pound of silver.
Right up until very recently, silver has been the predominant metal in coins. Eventually the price of silver rose to the point where it cost more, and several times more, to procure the silver than the face value of the coin. For instance a silver dollar these days is worth several dollars by way of their silver content, and while silver coins are still around, their days of use as commonly used legal tender have passed.
This is also the case with gold, and while the denominations of gold and silver coins could have been changed to represent this higher value, this still would make them impractical for widespread exchange. So mints ended up having to choose cheaper metals such as copper and nickel for their raw materials for coins generally used in circulation.
Prior to that though, silver has had a lustrous history as both money and as a store of value. Silver has also been widely used in jewelry, as has gold, and the cheaper price of silver has lent itself to being used in making jewelry of a more modest cost. It is still used a lot in jewelry, and is both easy to work with and is an excellent conductor of electricity, leading to industrial uses for the metal as well.
Silver as a Commodity
It is estimated that we have mined about 1.4 million tons of silver throughout history, about 10 times more weight than all the gold ever mined. About half of this silver has been lost throughout the ages, while with gold, most of the gold ever mined is still around, and its higher value has led to its being retained at a higher percentage.
When the U.S. moved away from the gold standard in 1971, this caused both the price of gold and of silver to rise significantly. Over a three year period, the price of silver rose from below $8 an ounce to almost $30 an ounce.
For a brief time in 1980, it rose to over $110 an ounce, it’s all time high, when the Hunt Brothers accumulated a massive position of $4.5 billion worth of silver, stimulating a wild run that ended up crashing down upon them. Since then the price has fluctuated considerably, dropping below $6 in 2001, and rising to over $50 in 2011. In 2017, it is back below $20 an ounce.
Like other precious metals, the price of silver is governed by market forces, and silver is a widely traded commodity on commodity exchanges. While not as actively traded as gold, silver volumes fluctuate more widely and the price of silver is notoriously more volatile than gold, making silver even more risky and less stable as an investment.
This means though that one may realize even higher profits by trading in silver, especially if one is using leveraged trading like trading in commodity futures. When trading in futures, one need only put up part of the money and borrow the rest, and this allows price fluctuations to be magnified in both directions.
Since the intent is often not to ever take possession of the commodity in futures trading, and instead just speculate on future price movements of the commodity, the future price of silver in this case, this allows many more people to trade the market who may not be interested in holding these assets, providing a lot of extra liquidity or trading volume to the market.
Silver does have the added benefit of being able to be held as a store of value if one wishes, as is the case with other precious metals, and this isn’t something that one would not be able to do with most commodities. Most commodities are only useful as business inputs, and one would have to be in that particular business to ever make use of them, in agriculture or the energy sector for instance.
Silver as An Investment
On the other hand, people can and do stockpile silver, although less commonly than they stockpile gold. Silver is considerably less portable by weight, being worth less than 1/60th that of gold by the ounce. It is therefore more expensive to handle and store and this is one of the big advantages of gold, given that such a small amount of it is worth so much. This is less the case with silver but it still can be stockpiled quite reasonably.
Silver is particularly tied to changes in the world economy, even more so than gold, and this is the big reason why it is more volatile than gold price wise. Silver is relied upon less as a hedge than gold, as a matter of preference, and therefore the trading in silver more reflects people’s outlook for the economy, appreciating in price when a downturn is expected, and being less valuable, having less demand in other words, during times of boom and stability.
The silver market is also considerably less liquid than gold, so with less demand overall, it becomes more subject to price volatility. The less demand there is in the market for something, the more likely it is to move more widely, and even though very liquid markets can swing a lot, this is even more the case when less liquidity is present, where a herd mentality can influence price more.
The gold market is about 20 times larger in volume than the silver market, to give you an idea of the difference here, and although this may seem to put silver into a sort of niche market, this is not the case, it’s just that gold is so heavily traded.
This does allow for very large investors to influence the silver market considerably, as was the case with the Hunt Brothers in 1980, controlling about 100 million troy ounces at one time. Warren Buffet once controlled about 130 million troy ounces, and this extra demand while being accumulated is of such a magnitude that it can indeed influence prices quite a bit, especially short term.
None of this extra volatility necessarily makes silver less desirable as an investment, and it may make it more desirable, depending on your risk tolerance. For risk seekers, the added volatility is a benefit, and one can speculate on both sides of the commodity if one wishes, speculating that it may either go up or go down, and profiting if one is correct.
Silver based exchange traded funds also tend to hold very large positions in the silver market, sometimes even of a magnitude of several hundred million troy ounces, and individual investors can get in on this with very small amounts, as is the case with all exchange traded funds.
The iSilver ETF, the world’s largest, controls 340 million ounces of silver, a very substantial amount, and this is not a position that can be liquidated very easily, so the value of this ETF is pretty much married to the price of silver. This allows for investors to easily get in and out of silver pretty much instantly though, for pretty much any amount they desire, which can be quite useful.
Silver bars and silver coins can also be purchased, and many banks offer this precious metal over the counter, as well as one being able to purchase silver from dealers. This is not a very efficient way to trade in silver though and is really only suitable if one is seeking to hold it long term in storage, otherwise it is preferable to just take a position in it, either in the market directly or through an ETF.
Silver has been used as an investment vehicle of sorts for a very long time, and due to its scarcity and its desirability, that has persisted over centuries, it remains a prominent way to both store value and to look to profit by way of speculation.
Silver FAQs
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What is the best place to buy silver?
The best place to buy silver will depend on whether you want to own actual silver or would be happy enough to own shares in it. You can buy physical silver from precious metal dealers, who will either ship you the silver, hold it for safekeeping, or sell you a non-allocated quantity, where they promise to deliver it upon demand. You can also buy shares in silver ETFs.
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Is silver a good long term investment?
Silver has not appreciated in value at all over time net of inflation, so while it can still be used as a hedge against inflation, its price is too volatile and the risk is therefore too high to make sense of this. Investing in silver long-term therefore isn’t a good idea, but speculating on its price in the short to medium term can be profitable if you get in and out at the right times.
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What is a silver future?
Silver futures involve either the buying or selling of contracts to purchase or sell silver at a certain price in the future. If you believe the price of silver will rise, either temporarily or at expiration, you can buy contracts and make money if it goes up. If you think the price will go down, you may sell contracts and bet that the price will drop.
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Is silver a commodity?
Silver is a commodity, which means that it is bought and sold on markets in a standardized way, with both quality and quantity specified. When you buy silver of a standard quality, silver bullion, one coin or bar of silver is similar enough to another that it makes no difference which coin or bar that you buy as they are all of similar value, which is what a commodity is.
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What is a silver ETF?
A silver exchange traded fund, or ETF, is a fund that pools money from investors and purchases physical silver with it. The total ownership of the pool of silver is divided up into shares, where people can buy and sell these shares just like they would with shares on the stock market, and still take a real position in silver.
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Is silver an asset?
Silver is indeed an asset because it is an item of value that can be exchanged. If you own a certain amount of silver, it will be worth a certain amount at today’s prices, which isn’t really the price you see on the market if you own physical silver, but instead what you could sell it to a dealer for. The value of silver ETFs are much closer to market value though.
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What is the best way to invest in silver?
In the old days, there was only one way to invest in silver, which was to buy and hold physical silver. Physical metals aren’t very liquid, as it takes time to sell and ship actual silver, and you also pay a big spread. Silver ETFs are far more liquid and efficient, where spreads are much thinner and you can enter and exit positions with the click of a mouse.
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Why is silver so cheap compared to gold?
We might think that gold costs so much more due to gold being much rarer than silver, but this is only part of the story. Platinum and palladium are both rarer than gold but usually cost less. One of the biggest reasons why gold is a lot more expensive than silver is that people simply are willing to pay more for gold, although silver being in greater abundance does matter a lot as well.
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What are the best silver coins to buy?
Since silver is a commodity, and we buy silver to speculate on its price, the future value of one coin or another will be similar. However, certain silver coins bought on the retail market may be marked up for their collector value, and if you are in it for investment purposes, it’s best to buy those that have the least markup and treat them as the commodity that they are.
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Is it better to buy silver coins or bullion?
Silver coins are actually a form of silver bullion, since bullion refers to a metal’s purity and not its form. You can buy silver bullion in the form of coins, bars, and rounds. Coins can be seen as preferable to investors who may be worried about catastrophic events that may allow coins to be more readily exchanged among the public than other forms if needed.
References & Scholarly Articles for Silver
Books on Silver Investing
- The Silver Manifesto (Authors: Christopher Marchese and David Morgan, Originally published: January 27, 2015)
- The Silver Bull Market: Investing in the Other Gold (Author: Shayne McGuire, Originally published: 2013)
- Get the Skinny on Silver Investing (Author: David Morgan, Originally published: 2006)
Editor, MarketReview.com
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: monica@marketreview.com
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