Is Silver an Investment? Is Silver a Hedge?

The price of silver has increased from $14.87 in May 2019 to $17.90 at the close yesterday (Oct 30, 2019). That’s a whopping 20% increase and people are coming out of the woodwork to tout the incredible silver as the best investment. Commercials for silver on TV have been saying for years that “the price of silver could double in the future.”

Is this a valid thought process? Is this hysteria, is this a great opportunity or did we just miss a great opportunity?

Let’s examine the hard data and see if we can make a case for the reliability of silver as an investment or as a hedge.

The figure shows the price of silver over the past 30 years. The shaded areas show the three recessions during those 30 years.

You don’t need a Ph.D. in statistics to see several facts.

  1. The price of silver was relatively stable in a narrow range around $5 per ounce for 14 years from 1989 to 2003.

  2. The price of silver has been trading and fluctuating in a limited range between $14 and $20 over the past 5 years.

  3. In other words, out of the last 30 years, silver prices shifted from a non-predictable 14 years of fluctuations in the range of $4-$6 to a non-predictable 5 years (so far) of non-predictable fluctuations in the range of $14-$20.

  4. The price of silver was in a bubble in 2011 and dropped 20% in 3 days

  5. The price of silver was in a bubble in 2008 and dropped by 50% in 8 months

  6. You would have been hard pressed to predict the price of silver at any given moment from 2005 to 2013 with the exception of recognizing bubble behavior (which I actually recognized in 2011, when sold half of my silver within 3 days of the bubble burst…getting out with double my initial investment).

When looking at this graph, my admittedly subjective eye leads me to believe that the price of silver is unpredictable except in rare cases which are very short term (such as when identifying bubble behavior). That is one of the “35 Valuable Lessons I Learned in 35 Years of Part-Time Investing” which is the title of my upcoming presentation on November 19, 2019 at SJREIA.

If the price of silver is unpredictable most of the time, most people would agree that investing in an unpredictable vehicle is gambling during that time.

For that reason, I do not believe that silver is an investment most of the time. There are times when silver may be an investment or seems like it should be an investment. This will be discussed below.

There are also times when silver might be considered as a hedge against looming economic issues.

Let’s illustrate by a real life example.

I bought a non-negligible amount of silver and silver ETF in February 2008 at $19.50 per ounce. I also bought an equivalent amount of gold ETF at that time upon the recommendation of my licensed investment advisor. That is when the subprime lending problem became public. At that time, there was also very public talk of a bubble in the real estate market which already showed signs of being in progress. Both the subprime lending market and the real estate market eventually turned out to be major issues, but I could not know that for sure at that moment.

Nevertheless, enough data was evident to suggest that investors should proceed with caution and many of us considered conservative alternative investments for diversification.

I thought that investing in silver and gold in February 2008 was a reasonable and conservative decision.

Within months, the value of my silver dropped by 50%. But I held firm.

By February 2009, the stock market fell by 50% and the real estate market bubble burst was in full force.

Was silver functioning as a reliable hedge against stock market drop in 2008? No.

Did the recent run-up of silver prices by 20% in coincide with a drop in the stock market or real estate market? No.

When examining the “trend” of the past 5 years of silver prices, the 20% increase is yet another blip in the natural fluctuation in the price of silver within the range of $14 to $20, unless this time, the prices will breakout of that range.

Do you have a dominating convincing reason to believe that the price of silver will breakout of the range right now? I don’t. It might. It might not.

Therein lies the problem.

None of us can know what the price of silver will do right now.

When you look at the 30-year price behavior of silver, you realize that you can’t even rely on the appreciation of silver over any 10 year period.

I seriously urge you to choose any 10-year period in the graph and be honest with yourself to see if you could have predicted the behavior of the price of silver at any given point except immediately after a bubble.

If you can’t rely on any type of fundamental analysis to reliably predict what the future is likely to bring, you should substitute the word “invest” with the word “gamble.”

In contrast, when you buy distressed real estate at a price of 40%-45% of current retail value knowing that you will invest 30% of retail value in renovations, you can know with high confidence that the market would have to drop by 25%-30% to break even, not even lose money. If you buy, renovate and hold the property as a rental, you can weather the downturn as long as you can maintain positive cash flow.

If you want to consider silver as an investment or as a hedge, you are free to do so. I still hold some of my silver to diversify my investment portfolio. I am not happy with the performance of my silver and I am not confident in its predictability. That is why I reduced my exposure to silver. But diversification is still important.

You make your decisions that you live with and I make my decisions that I live with.

Happy Investing!

Attend my presentation “35 Valuable Lessons I Learned in 35 Years of Part-Time Investing” which is the title of my upcoming presentation on November 19, 2019 at SJREIA.

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