In today’s Exponential Investor:

  • Is silver a good hedge against inflation?
  • Cherry picking data
  • Silver follows copper, most of the time

Poor man’s gold…

The money of gentlemen…

The “other” precious metal…

Depending on the pocket of the web you inhabit, the precious metal silver goes by many different names.

With gold struggling to live up its moniker as an inflation hedge, some investors are wondering if perhaps silver might be the better metal.

Some, let’s say “passionate”, silver fans will tell you silver is the only precious metal that matters anyway.

They’ll forgo gold altogether and invest heavily in silver, under the belief that silver’s true value is being manipulated, and that silver should be many multiples higher than it is.

Then there are the institutional traders.

This group treat silver more like a base metal that comes with “precious-metal upside”. The “instos”, as they’re called, understand silver’s critical role in the industrial sector, but also that this other precious metal will jump up or down with gold on occasions.  

But both parties are right. Silver should play an important role in your portfolio.

Just not as an inflation hedge…

Is silver a good inflation hedge?

Since the start of September, silver is up 8.5%, rallying from US$17.80 per ounce to resting at US$19.32 today. This is in stark contrast to gold’s meagre 0.36% decline over the same period.

Silver’s near two-week run higher came undone on Tuesday after white-hot US inflation data. Once again, our American friends found their inflation running at 8.3%, much higher than expected, and making another 0.75% rate increase in September from the Federal Reserve more or less certain.

As inflation shows no signs of abating in either the US or the UK, investors are now looking for places to hide.

Traditional inflation hedges, such as gold, property, and even commodities are quite popular places to park some cash while inflation drives up the cost of living.

Can we add silver to that list?

Well, yes… and no.

Like almost all assets, whether something is an inflation hedge depends on where you start counting.

If you go back a few centuries, silver has performed exceedingly well over that timeframe compared to inflation.

Or, if you choose to compare silver’s performance against inflation since the start of this century, the price of silver is 10 times higher than in the year 2000. Meaning silver’s price rises did beat inflation, which averaged 4% per annum over the same period.

But if you choose a shorter period in between from the past two decades, you’d get a completely different picture. And not one that favours silver, either.

For example, if you bought silver at the start of 2021, the metal has fared badly. The silver price is down 24% in the past 20 months. Any money invested in silver from then to now means you’re even further behind when you factor in that the average inflation over this period was 6.5%.

Inflation has been much higher in the past two years than the past 20, yet silver isn’t keeping up with it.

This is primarily because silver as an inflation hedge only works over a very, very long time. Measure it year to year or even decade to decade and silver won’t keep up.

But though silver might not be a useful inflation hedge in the short term, it still has a place in your portfolio.

Understanding silver’s investment potential

Silver’s spot price is such that it behaves like a commodity for the most of the time, and a precious metal only some of the time.

Institutional traders treat it like a base metal because it has hundreds of industrial applications.

Of the billion or so troy ounces (toz) of silver refined each year, about 20% goes into jewellery. A smidgin less is turned into physical bars and coins. A sprinkling goes to silverware and photography equipment. But the lion’s share – some 524 million toz – is gobbled up by industrial use.

Due to silver’s vast use by industry and manufacturing, when the metal behaves like a commodity you’ll find it follows the copper price most of the time.

Copper is considered a leading indicator of global economic activity because it’s used in so many industries. Copper is in virtually anything electrical, the pipes in our house for water and heat, every electronic device, and even the cars we drive.

Copper is an integral part of every industry around the world. Without it, there’s no building, no electronics or telecommunications. When you see the copper price climb higher, it means economic activity has increased.

So, when the global economy is expanding – with increased construction or manufacturing – the copper price will rise to reflect this, and often take the silver price along with it.

Spot silver (blue line) vs. copper futures (orange line)
Sep 2021 – Sep 2022

Source: Trading View

Ways to invest in silver

Silver won’t be a useful inflation hedge for the short term – rather, it gives you a chance to benefit from future economic growth because it moves with copper.

There are a couple of ways you can invest.  

If you prefer owning the physical metal, remember that you pay a premium (the cost of fabrication to turn the silver into an investment-grade coin or a bar) on top of the spot price. This premium could be anything from 15-10% for cast bar to as high as 30% for a coin. Don’t forget to factor in storage costs as well. You really should keep your physical metals in a secure storage facility rather than at home under the floorboards…

Don’t forget, the premium and storage costs will increase your “breakeven” point, meaning that the spot price of silver will need to move higher for you to make a profit.

An easier and less fiddly way is to buy silver is through an exchange-traded commodity (ETC). This way you get exposure to the physical price movements of silver in pounds, without the hassle of trying to find secure storage for the precious metal.

Silver might not be the ideal inflation hedge, but its correlation with copper instead of stocks will help to diversify your investments.

Until next time,

Shae Russell
Co-editor, Exponential Investor