Investors have plenty to worry about. Inflation, a slow recovery of job growth in the U.S. and competition from foreign economies just to name a few factors giving investors that sick feeling in their stomachs. And for many investors, the perfect answer to all these woes is owning precious metals.
The prices of gold and silver have been on a tear since, most recently, 2007 when the stock market peaked. Investors look to precious metals, namely gold and silver, as stores of value to preserve their assets if paper currency depreciates. The price of the iShares Silver Trust (SLV), which tracks the price of silver, has nearly doubled from its low to its high price the past 52 weeks.
Silver has done even better than gold, which isn’t easy to do. The SPDR Gold Shares (GLD) are up 36% from their low to their high over the past 52 weeks. While silver’s gains are impressive, it’s important to note that gold’s bull market started earlier than silver’s.
But all this doesn’t help you much looking forward. Remember that precious metals like gold and silver aren’t stock. With stock you get pieces of ownership of companies that produce revenue, earnings and dividends. When you buy precious metals, you’re speculating. In other words, you’re betting that you’ll be able to sell the metal to someone else, in the future, for more than what you paid.
Let’s be clear about what you’re asking in your question. You’re not asking about whether you should put a small amount of your portfolio, say 5%, in silver in order to diversify risk against inflation. What you’re asking about is shifting a bulk of your portfolio into silver on the fear the economy is going to get a whole lot worse. That’s a much different question.
If you fear economic catastrophe, then you can build a case for owning silver. In 2007, when investors are panicked about the financial crisis, gold jumped 30% and silver soared 14% as both metals were viewed as safe havens, says Ken Winans a market historian and money manager at Winans International. “Silver does well when stocks have a bad run,” he says. Meanwhile since 1999, when the Standard & Poor’s 500 stock index was flat, both gold and silver have beaten stocks by a wide margin, Winans says. If you think stocks are in for another disappointing decade, then history would say, precious metals will be a good place to be, he says.
But you’d have to be extremely pessimistic about the future to place a big bet on silver now, especially given its recent run. Silver’s 80% gain in 2010 was its best year since 1989, Winans says. Buying assets coming off their best year in recent memory doesn’t usually pan out all that well.
And when precious metals suffer, they really suffer. Silver has posted annual declines 43% of the time going back to 1990. So if you think the economy will break out of its troubles, “it’s hard to make a case gold and silver can continue to outperform,” Winans says.
Consider what happened in the wake of the inflation scare of the 70s. Gold rocketed 165% and silver 361% in 1979, Winans says. Silver ended up falling 45%, 45% and 18% in 1980, 1981 and 1983 respectively with gold losing 32% in 1981 and 16% in 1983. Silver ended up losing 90% from the 1980 high and the 1982 low and gold fell 65%.
If you’re going to bet on silver, it’s best to treat the bet like you would a position in a very volatile individual stock. Make sure you know what price at which you’d sell. And if the price falls to that level, don’t ask questions and get out.
I know this is kind of a non-committal answer to your question. However, the answer is unknowable because it’s based on whether or not the economy will recover. If the economy gets better, then silver won’t be a good investment, but if the economy continues to stagnate, then silver will likely do well.
You just need to make your call on the economy’s future, decide if it’s worth speculating on a risky asset, and then proceed.
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