A risky game: the cost of investing in silver
Silver is undergoing a transition...
At the advent of photography, silver used to claim huge demand that its prices began to appreciate like never before. As industrialisation progressed, silver found new applications. But now, silver is at a point where investment demand and not industrial demand is guiding the prices.
GFMS, the precious-metals consultancy wing of Thomson Reuters forecast that implied net investment in silver is expected to climb 82milllion ounces to reach 234 million in 2012 from 2011! Meanwhile, industrial demand of silver is expected to drop by 28 million ounces. This, however, does not mean that silver industrial demand is going to expire: the driving factor behind prices has changed from industrial demand to investment demand. (Silver ETFs at around 600 million ounces as of Nov. 23 is also near to an all time high.)
“Many analysts tout silver’s duel role as an industrial metal as an added advantage,” said Brien Lundin, author of the Silver Bullet Strategy, published by Gold Newsletter to Market Watch. However, “it is silver’s monetary utility that justifies its current valuations, and that is the only basis on which it should be analyzed in the current environment,” he said.
The good side of investing in silver is that it wins both ways: if there is a downturn in the global economy which is also awash with funds due to easing measures, silver prices would generally skyrocket. And if the industry is upbeat, then demand from photovoltaics to food sector would lend support to silver prices.
Silver is widely touted to be scarce than gold. (Pure play silver mines are rare). This coupled with its affordability when compared to gold—one can buy 50 times silver for same price as that of gold-- has helped the commodity to remain in the spotlight. But there is a flip side to this talk.
“Silver usually climbs about twice as much as the price of gold during uptrends, and declines by about twice as much during downtrends,” said Steven Kaplan, a senior editor at TrueContrarian.com--a site that offers analysis on financial markets--adding that silver has a much smaller total market capitalization, in a Market Watch report. “Silver is for investors who are willing to take about twice the amount of risk as gold investors,” he added.
If you are serious about silver investment, then you may have to hold yourself to the metal not less than a 24-month time period, given silver’s price volatility. If that’s not an option, then the “lack of volatility [in] gold’s versus silver’s price makes gold the safe way to go,” he said.