The risks of Silver

In many of my previous articles, I have always encouraged Singaporeans to buy precious metals such as gold and silver bullion as a means to build up wealth in Singapore. This is because I have always believed that wealth is more secure in the long run when invested in physical bullion than in the current stock market, which I think is long overdue for a massive correction. But the perennial question is: is it worthwhile to buy silver or gold bullion? How do you build wealth with silver and gold bullion? To answer this question, it is important that Singaporeans understand the risks involved in silver investments.

Many novice investors thought that prices of silver tend to go in tandem with gold. This is not true and history has validated this point. During the Great Depression in the early 1930s, many people were buying gold to preserve their wealth, resulting in surging gold prices. But surprisingly, silver demand declined sharply during that period. Also, during the Civil War in America during 1860s, silver fell while other commodities like steel and rice soared. So the gist is that unlike gold, silver should not be mistaken as a form of wealth preservation during turbulent times. Unlike gold, it is not a sure thing that the price of silver will go higher during crisis times. History has proven that in terms of investment track record, gold fared much better than silver.

One of the key reasons why silver bullion is not featured in many professional investors’ portfolios is because silver is a very volatile investment. It can surge more than 5 percent in one day and therefore, not many people can stomach this kind of volatility. In fact, silver reached its peak during 1980, valuing about $50 per ounce. 34 years later, it is languishing at less than $20 per ounce while gold has more than doubled in value since then. Of course, with volatility, there are opportunities to make money but then again, the difficulty in predicting the direction of silver prices had deterred many investors from buying silver. With silver, you stand a higher chance of losing lots of money if you are not careful with the price volatility.

Indeed, there are many supporters for gold and there were huge demands for the precious metal even during price corrections. In fact, when gold price dropped to record level last year, China and India governments took that opportunity to import more gold at bargain prices. However, this was not the case for silver. According to data collected by The Silver Institute, since 2000, governments had been net sellers of silver. This is because silver is not seen as an asset class like gold. Compared to gold and alternative investments like stock and bond, silver bullion has lower buying interests. There are simply very few financial gurus out there recommending investors to buy silver as a form of investment.

In conclusion, silver has it heydays back in 1980 but it does not mean that the peak will never return. With silver, it is always a mystery because you cannot take a contrarian approach and expect to make money through the usual buy low and sell high strategy. Nor can you view silver from the demand supply lens. Traditionally, silver has industrial demands, so logically, it should become rarer than gold and should cost more than gold. But historically, this was not the case. So in short, there are too many drivers that can push the price of silver up or down and investors are still learning how to feature silver in the mainstream investment system. But despite all these, investors should not write off silver as a means of building wealth yet. Just think about it, if silver is really not viable as a form of investment, then why would Warren Buffett purchased 130 million ounces of silver in the late 1990s?

Magically yours

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