Why invest in silver?

Ask 10 people why you should invest in gold and silver, and you’ll probably get 10 different answers – many of which will be accompanied by a shrug. Most investors don’t understand the motivation for holding gold or silver bullion. Nonetheless, it’s been difficult to ignore the spectacular rise in silver prices of late. Since the start of the year, the silver spot price has spiked more than 17 percent, and a lot of market analysts are calling for higher prices before the year is out. Here are a handful of reasons to consider adding silver to your own portfolio:

1) Inflation. Precious metals like gold and silver offer a hedge against a falling currency. Let’s say for example, you buy a one-ounce silver American Eagle coin for $30, then stash it under your bed for six months. If the value of the dollar drops 50 percent over those six months, you should be able to sell your silver coin for $60. The value of your coin didn’t necessarily change, but the purchasing power of the dollar most certainly did. In this way, precious metals, which are finite, act as a “store of value,” protecting your assets against a depreciating currency.

2) Industrial appetites. Industrial uses for silver account for 44 percent of worldwide consumption (per Global Watch). Since the fresh supply of silver that enters the market every year is limited, increased investor demand for the metal can cause prices to rise rapidly. Over time, industrial demand also diminishes the global supply. Unlike gold, silver that’s used in electronics, jewelry and sanitation equipment often finds its way into landfills where its lost forever.

3) The power of ETFs. When investors buy stock in the iShares Silver Trust ETF (NYSE:SLV), iShares backs those investments by purchasing silver and storing it in secure vaults. This saves silver investors the hassle of storing the metal themselves and makes it easy to move in and out of silver positions. The more people who pour into the ETF, the more silver that comes off the open market. As of March 7, investors have sunk more than $12.3 billion into SLV. iShares backs that huge chunk of cash by holding nearly 10,900 metric tons of silver in vaults (as of March 7). Over the past 12 months, stock in SLV has risen 108 percent.

4) The emerging world. The development of a middle class in China and India has led to increased investor demand for precious metals. Since the cost of entry is so high, investors in emerging economies are more likely to turn to silver rather than gold as they look for a way to protect their capital against rampant inflation. “Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010,” writes Julian Phillips of Global Watch. “We fully expect this growth of demand from that source to continue in 2011 and possibly for the next decade.” Last year alone, China imported more than 3,500 tons of silver. Compare that to 2005, when China exported 3,000 tons of the metal. The U.S., after all, isn’t the only market that dictates the price of silver – especially as governments around the world are grappling with inflation.



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1 Comment on "Why invest in silver?"

  1. The power of ETFs. When investors buy stock in the iShares Silver Trust ETF (NYSE:SLV), iShares backs those investments by purchasing silver and storing it in secure vaults.

    The only thing backing up the ETF’s is paper. There is no silver in Comex vaults as the world will discover in the coming weeks/months.

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