In the past dozen years or so we’ve been hearing a lot about gold as an investment. This is been the case in part because the price of gold rocketed from a 20 year low in 2000, to an all-time high of nearly $2,000 an ounce in 2011.
We’ve also heard a lot about gold because of the dot.com bust that started in 2000, and the financial meltdown that began in 2007. Gold tends to perform best in times of great uncertainty, and the early 2000’s certainly brought us such a time.
Less well covered – and largely out of the public eye – has been the performance of silver. The price of silver similarly exploded, from a low of less than $4 per ounce in 2000, to well above $30 at the recent market peak.
When the financial press talks about precious metals, they’re mostly talking about gold, and not about silver and other precious metals. Yet silver may stand alone as a better investment choice for middle-class households – and the comparison may not even be close.
There are at least five reasons for this:
1. Lower price puts silver within reach
With the current price of gold sitting at about $1,300 per ounce, the typical middle-class investor can buy no more than a few ounces. For example, let’s say that you have a $50,000 investment portfolio, and want to keep 10% of it – $5,000 – in precious metals.
At best, you’ll be able to buying no more than four ounces of gold, and when you add transaction fees to the purchase, you’d actually be putting out something closer to $6,000.
Now let’s say that the same middle-class investor decides to go with silver instead. With silver currently trading at about $20 per ounce, he’d be able to buy 250 ounces of silver for $5,000.
Taking it a step farther, it’s possible that investors who have only $10,000-$20,000 in their investment portfolio would be unable to buy gold at all. In addition, a position that would only involve two, or three, or four, one-ounce gold coins wouldn’t represent much of the diversification.
2. Greater profit potential
At current market prices, gold is now trading at 65 times the price of silver. While that has been the conversion ratio for at least the past 15 years, it’s a radical departure from the historic norm.
Until 1933, when the US government confiscated gold bullion, the historic ratio of gold to silver was 20:1. One ounce of silver was equal to one dollar – which is how the silver dollar coin came to be – while the price of gold was fixed at $20 per ounce (or more precisely, the value of the US dollar was set at 20 to 1 ounce of gold).
Should an economic or financial calamity cause the value of metals to take off, the current gap between gold and silver could close, causing silver to rise faster than gold.
For example, let’s say the crisis causes the price of gold to rise from $1,300 per ounce to $13,000 per ounce – a factor of 10. Let’s say that silver, at $20 per ounce, not only rises in price in concert with gold, but begins to move closer to its historic conversion ratio.
In such an environment, silver rises to the point where the conversion ratio shrinks to 30:1. This would cause the price of silver to rise to $433 per ounce – or by a factor of nearly 22 times its current price.
This will mean that an investment in silver would rise by more than twice the price of an equivalent amount of gold purchased before the run-up in price. In this way, silver can have greater profit potential, even though both metals are benefiting from a bull market.
3. It can be used in barter transactions
When you are middle-class, you always need to think in terms of survival, if only because you don’t have the kind of investment portfolio that would allow you to ride out a seriously bad economic environment. In this way, your silver holdings can serve as both an investment (preservation of capital asset), and as a survival asset.
Since the low price of silver will enable you to have a large hoard, you can use some of that to pay for living expenses. That will be much easier and more convenient with $20 silver coins than it will be with $1,300 gold coins.
You can use silver coins to barter for food, gasoline, car repairs, or any expense were a vendor might accept them. And if the economy is bad enough, you can bet they will.
By contrast, think about presenting a $1,300 gold coin for payment of car repair. How would the vendor make change? The high price of gold simply makes it unsuitable as a barter asset in most common situations, and even more so in an economic crisis as the price rises out of all proportion to everything else.
4. Silver is less likely to be confiscated than gold
Get into a conversation about gold, and sooner or later the topic will move toward the prospect of government confiscation, simply because it has happened in the past.
When the administration of Franklin D. Roosevelt implemented the confiscation of gold bullion in 1933, they didn’t confiscate silver. In fact, silver continued to represent money – being the primary metal in dollar coins, half dollars, quarters and dimes – straight through to 1965.
They even continued to circulate for several years after, until the price of silver got so high that most of it was redeemed at a substantial profit.
There is no guarantee that a gold confiscation wouldn’t extend to silver the next time around, but it is nonetheless highly unlikely. The reason is simply that the lower value of silver makes it less attractive as a monetary asset to be seized by the government.
As well, silver coins tend to be more dispersed throughout the population than gold coins, making a confiscation harder to enforce. Also, gold continues to be held as a central bank reserve asset, while no central bank holds silver in the same capacity.
5. Silver will likely be a better cash substitute than gold
We talked earlier about the use of silver as a barter asset, but it is also entirely possible that it can become a cash substitute. Should US inflation rise to double digits – the way it did in the 1970s – Americans may become very reluctant to accept dollars as a form of payment. In such an environment, silver can become one of the primary cash substitutes.
The fact that it has a much lower value per ounce than gold makes it both more transferable and more divisible. Lower price also means that many millions of people will be able to afford to use silver coins as cash, while just a few thousand wealthy people will be able to use gold for cash transactions.
Silver has a long history as cash, and has often functioned as a cash asset alongside of paper money. And long before paper money was considered cash, the use of silver was both common and normal.
In this way, silver has a deep history as cash. Silver is sometimes referred to as the poor man’s gold precisely because it is the preferred precious metal of the masses. Gold filled that role for kings, emperors, and the wealthy, but the just plain ordinary folks used silver, and it worked exceedingly well in the role.
If you aren’t certifiably wealthy, and you’re looking to add physical precious metals to your investment holdings, you might favor silver over gold. And it is likely that it will serve your interests much better in the future.
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