Is Silver a Good Investment? Let’s Compare it to Other Investment Options
Looking to find out if silver is a solid investment? Join us with this article to find out for yourself!
While we certainly agree with this statement, we would have to include a third: change.
At the time of this writing, the Covid-19 pandemic has been declared “officially over” yet we remain in the midst of supply chain issues, food shortages, a global energy crisis, a forty-year high in inflation, shaky financial markets and are on the brink of war with Russia.
Additionally, the Bank of England just intervened to prop up a collapsing UK bond market. Needless to say, these are uncertain times, to say the least.
These uncertain, and in many respects, unprecedented times, have caused individuals to reevaluate their investment philosophy and portfolios. Unfortunately, I was given misleading and false information in my college finance and economics courses and at my first job regarding 401k plans.
They all made promises of retiring as a multi-millionaire if I followed their “plan.” The world today really is different and many of our customers are being introduced to silver as a valid investment for the first time in their lives. If your financial advisor has never recommended silver, or for that matter, precious metals in general, there may be a reason for that.
We share a few reasons why that might be the case.
By now you may be wondering – is silver a good investment? We believe the answer is a resounding “yes!” But, before we can recommend silver, we need to take a step back and evaluate this investment option on its own merits and relative to other investment options to determine which one is best.
When faced with a list of choices, you shouldn’t have to choose between bad or worse options.
Rather, your goal should be to select an investment option that will give you the best chance for success, whether that be capital appreciation (also known as capital gains) or wealth preservation.
Let’s begin this discussion with an evaluation of five “traditional” investments, their current valuations, and future outlook as compared to silver.
In addition, we will provide you with some objective reasons as to why we believe that silver is a good investment, and why it may be one of the best investments in the market today.
The Stock Market
The U.S. stock market is the largest and most liquid stock market on the planet. At the time of this writing, the market cap of the S&P 500, according to Slick Charts, is $31.75 trillion. This clearly is an enormous market, but it has lost nearly a quarter of its value since its all-time high market of $40 trillion in December of 2021. To put it differently, approximately $9 trillion in value has evaporated over the past nine months. Unfortunately, these losses are affecting real people, as we highlighted in a previous article titled, “How not to lose $400,000.”
Clearly, the market is on shaky ground and could be heading even lower.
One reason the stock market was performing well during the pandemic is because of artificially low interest rates precipitated by loose monetary policies from the Federal Reserve.
In other words, they created money out of thin air and used it to purchase bonds, which helped to suppress interest rates. They’ve since reversed course and have been raising rates to fight inflation, which has contributed to a slowdown in the economy. Higher interest rates make it more difficult for companies to service their debt payments.
Furthermore, it makes it more challenging to grow and expand businesses profitably when it becomes harder and harder to generate any type of healthy return on investment.
As an example, if you’re building a new car wash and must finance the funds to get it going, you’re now paying twice as high of an interest rate on your business loan as you did a year ago. What this means is that you need to have substantially more vehicles run through your facility daily than you originally projected.
Alternatively, even when you can try and cut overhead costs, it isn’t likely to work due to inflation driving all operating costs higher, including wages.
The fact of the matter is that you may not even be able to find individuals who are willing to work, even at higher wages.
Getting back to our original comments on the economy, we have recently seen hiring freezes, announced layoffs, disappointing earnings reports, subdued future projections, and in the case of some companies, such as FedEx, no future guidance whatsoever. Considering that these issues are just beginning, being in the stock market appears to have limited upside potential and substantial downside risk.
Not to mention, even though the market is currently in bear market territory (that’s when stock prices fall by 20% or more), the current Shiller price to earnings (p/e) ratio is still 26.8, which is significantly above its long-term average of approximately 17. When a market sells off, it tends to overcorrect, so we could see a stock market plunge in excess of 50% if not more.
The Bond Market
We’ve seen a major shift in the bond market over the past couple of years. In fact, 10-year bonds were yielding as low as .54% in March of 2020, moved up to nearly 1% at the beginning of 2021 and at last check were nearly 4% at the end of September 2022.
There is an inverse relationship between the price of bonds and bond yields, so as yields rise, the price drops. This has resulted in bonds being one of the worst-performing asset classes thus far in 2022.
The 30-year bond is currently yielding less than 10-year bonds, and in fact, the entire yield curve has inverted, which is an early warning sign of a pending recession. With a bond yield of less than 4%, the market clearly believes the Federal Reserve will be successful in its fight against inflation. In other words, they believe that inflation is transitory or short-lived and that inflation will moderate shortly in response to the Fed’s tighter monetary policies. The problem, of course, is that the Federal Reserve has been increasing interest rates since March of this year with no significant impact on inflation. Rates have increased from .25% to 3.25% and are expected to be as high as 4.25% by year-end.
While raising interest rates will eventually have an impact on inflation, as we saw during the Paul Volcker years of the early 1980’s, the reality is that the Federal Reserve will almost certainly pivot before there’s any significant impact on inflation. Pivot simply means that the Fed will reverse course and change their policy from a tight to a loose or accommodative policy.
The reason for a likely reversal is two-fold.
One, with $31 trillion in debt, much higher interest rates will make it nearly impossible to service our debt obligations.
Two, we’re heading toward, if not already in a recession. Historically, a recession has been defined as two consecutive quarters of negative GDP, but Wikipedia conveniently changed the definition to coincide with the current administration’s narrative.
Getting back on track, continuing to raise interest rates will plunge the economy into a deep recession, if not depression. It’s more politically acceptable to kick the can and deal with stubbornly high inflation than to nip the problem in the bud and deal with the short-term pain of a recession and high unemployment.
This is one reason we believe that inflation is here to stay for the foreseeable future.
Bonds, especially long-term bonds, are some of the worst investments during high inflation. This is because yields will have to increase to keep up with inflation, which will reduce bond prices. When bond prices fall, investors lose money.
We saw a nearly unprecedented rise in real estate prices from 2020 to 2022. This was primarily driven by artificially low-interest rates and the Fed’s intervention in the mortgage-backed security (MBS) market, driving 30-year mortgage rates as low as 2.66% in December of 2020. As recently as a year ago, mortgage rates were still only 3%. Since that time, we have seen a nearly unprecedented rise in rates.
According to BankRate, the current 30-year mortgage rate is 6.82%. This means that monthly mortgage payments have doubled over the past year, making home ownership unaffordable for most Americans.
Not surprisingly, this has had a major impact on the real estate market. Prices peaked a few months ago and have been on a downward trend since. We’ve seen higher inventories, lower prices realized and homes remaining on the market for longer. As recently as July, we had 10.4 months of inventory of homes on the market.
Historically speaking, the average inventory has been 5 to 6 months, and any level of 10 months or higher has been a precursor to a recession.
Even though prices peaked a few months ago, real estate, at least residential real estate, is still highly valued; especially when compared to the historical average. Not only are mortgage rates the highest they’ve been in 20 years, but mortgage lenders are also beginning to tighten underwriting criteria.
This combination is going to result in a housing correction sooner than later, which means that an investment in real estate appears to be a risky venture for the foreseeable future.
Historically, when there has been risk in the stock and bond markets, cash has been a viable alternative. Cash is viewed by most as a riskless asset, but with inflation rates of nearly 8.5%, an investment in cash means that you’re losing 8.5%, or close to it, per year. While an 8.5% loss is much better than the double-digit losses we’re anticipating in the stock and bond markets, it can still be devastating, especially for retirees and those on fixed incomes.
On the other hand, if you’re anticipating a substantial near-term correction in stocks, real estate or another asset class, and want to keep your powder dry, parking your funds in cash, at least on a short-term basis, may not be a bad idea.
They say you want to buy when there’s “blood in the streets.” In other words, buy when the market has collapsed and everyone else is panic selling.
However, if you’re like most folks and can’t afford to lose 8% or more to inflation per year, you may need to put your money in an inflation-hedged investment.
We’ll discuss shortly what we believe to be one of the best inflation-protected investments in the market today.
The last somewhat traditional investment option that we’ll highlight is Bitcoin, or more broadly speaking, cryptocurrency. Cryptocurrencies are one of the most intriguing, yet volatile alternative investments in the market today. We saw Bitcoin collapse to $3,500 in March of 2020 at the start of the pandemic, explode to $69,000 in November 2021, and pull back to as low as $17,500 in June of 2022. Since that time, Bitcoin has been trading in the $20,000 range.
Obviously, an investment in Bitcoin in March of 2020 would have paid dividends. Even at the low this year, that’s still a 5-fold increase. Alternatively, if you bought into the hype when Bitcoin was at $69,000 with near-term projections of $100,000, you would have lost over 70% of your investment. Bitcoin has created many millionaires, but on the other hand, has also financially devastated others; especially those that used leverage to buy it.
At the time of this writing, the Feds have been able to recover a substantial amount of Bitcoin that was stolen from investors by the founder of Mt. Gox. At the time, Mt. Gox was one of the largest cryptocurrency exchanges in the market.
While it’s great for those whose stolen cryptocurrencies will be returned, there’s concern among the Bitcoin community that creditors could dump an estimated 142,000 Bitcoin into the market, which could further suppress the price.
Bottom line is if you know what you’re doing, cryptocurrency investing can be quite lucrative, but if you’re a novice, it’s probably best to leave trading in this market to the experts.
The Investment Alternative: Physical Silver
Thus far, we’ve covered the five most popular investment asset classes and have shown you why all of them have downside risk. We believe that silver, and more specifically physical silver, is a far better investment than the other options, and in fact, may be one of the best investments you can make in this environment.
Let’s begin with silver as an inflation hedge. Historically, silver has proven to be a sound investment to protect against the ravaging effects of inflation.
Why hasn’t silver responded to inflation this go around as it has in the past?
The reason is two-fold.
One, the market is still betting that inflation is temporary or transitory and that the Federal Reserve will be successful in its fight. As we’ve discussed above, we believe that the Fed will be forced to pivot before they eradicate inflation.
Secondly, the dollar has recently reached new all-time highs. It’s important to remember that
the dollar trades in the foreign exchange (FOREX) market and that its strength is relative to the performance of other currencies. When we look at other currencies, such as the British Pound, the Euro, and the Japanese Yen, we see that these currencies are in even worse shape than the dollar. This has caused the dollar to strengthen versus these currencies, as well as others.
Since precious metals have an inverse relationship to the strength of the dollar, and the dollar has been increasing, the price of silver has been in a holding pattern. Considering the structural issues with our economy and currency, we expect the bull market (the opposite of a bear market in that prices or values rise) in the dollar to end sometime soon – especially if the Federal Reserve pivots. A weaker dollar bodes well for higher silver prices.
Now that we’ve cleared up why silver hasn’t risen in response to inflation, let’s talk about why it’s a solid investment. However, before we do so, for those who are interested, here’s another resource that outlines additional factors that affect silver prices.
When we look back at our Constitution, we see that the only acceptable forms of currency were in the form of gold and silver. This is because the founders knew that governments have always debased their currency. In fact, silver has been used as money throughout history for thousands of years.
Fiat currency, which is not backed by a commodity, but has been declared by the government to be legal tender, on the other hand, always eventually falls to its intrinsic value, which is zero.
At the time of this writing, the cost to mine, refine and fabricate physical silver is close to its current spot price in the futures market. This means that when you purchase silver, you’re acquiring it at close to its production cost.
There are few investments available that allow you to acquire an item at close to cost. What this means is that there appears to be limited downside risk and substantial update potential. As a former Risk Manager, I deem this to be a safe bet.
Not only is silver cheap relative to its production cost, but it is currently trading substantially below its all-time high of $50 set in 1980 and 2011. At the time of this writing, the price is hovering around $20 an ounce. Granted, physical silver may be trading for more, but even so, at these prices, you’re buying at much closer to its recent lows than recent highs.
Additionally, when you consider the fundamental and structural issues with our economy and current fiscal situation, silver seems like a better investment than most other opportunities. We have a national debt of $31 trillion, annual deficits in excess of $1 trillion, unfunded liabilities of over $250 trillion, and are seeing more and more countries cut their ties with the dollar. Not only are countries entering into direct currency swap agreements, thereby bypassing the dollar, but Saudi Arabia is rumored to be cutting its ties to the petrodollar. Furthermore, the BRICS nations (Brazil, Russia, India, China and South Africa) are well into discussions to form their own currency to rival the dollar, which are expected to be commodity-backed. Needless to say, there appears to be a bumpy road ahead, which is why silver appears to be a sound investment.
Finally, silver is one of the only investments that doesn’t have counterparty risk. However, this is only the case if you invest in physical silver in the form of coins, bars or rounds. Our motto, and we believe it should be yours as well, is “If you don’t hold it, you don’t own it.”
In other words, stay away from digital silver investments, such as ETFs, mutual funds, and other derivative investments. Most of these investments are highly leveraged, and in some cases, may not be backed at all by physical silver.
In conclusion, we’ve taken a look at some of the most common and popular investment asset classes and the current state of each.
We began with stocks, which at the time of this writing are in a bear market. Even though they’ve lost 20% or more of their value, they’re still highly valued and are likely to experience continued losses for the foreseeable future.
We then shifted our focus to the bond market. Bond prices have dropped, causing bond yields to rise, and investors’ holdings to plummet. In fact, the bond market has performed as bad if not worse than the stock market. Bonds are one of the worst investments in a high inflationary environment and pose tremendous downside risk to investors.
We saw an unprecedented increase in real estate prices from 2020 – 2022, but that ship has sailed. At the very least, the boat is no longer docked. Higher mortgage rates and an overall weaker economy is causing prices to falter. Cryptocurrency is also an interesting investment, but if you don’t know what you’re doing, you can lose your shirt. You also need to be prepared for potentially gut-wrenching volatility, which can cause even the most disciplined investor to eventually buckle.
We rounded out our discussion with silver and provided some compelling reasons as to why you should consider this asset class. Silver has proven to be one of the best investments as a hedge against inflation and as a way to not only maintain your purchasing power but also build wealth.
Currently, the spot price of silver is only moderately above production costs, which provides an inherent floor in prices. In fact, it’s about two and a half times below its all-time high. Considering our current fiscal situation, the present value of our unfunded liabilities, and the likely pullback in the strength of the dollar, an investment in silver appears to be a wise move.
We hope we’ve been able to convince you that an investment in physical silver is a prudent choice, especially in light of the other options available. If we have, and you’re interested in purchasing your first silver coin/bar/round, or want to add to your silver stacks, Atlanta Gold & Coin Buyers should be your local coin and bullion dealer of choice.
We have years of experience in the industry and can guide you toward the best options based on your unique circumstances and investment goals.
Give us a call today! 678-515-5763
Happy Treasure Hunting!