Why Buy Silver? Why Invest in Silver?

If you were to ask 100 average investors why they buy silver, you would end up with 100 different answers. However, the same thing could be said about all sorts of investments. The average investor has no idea why they invest in anything, yet alone choosing to invest in silver instead of investing in gold.

There is hope – the average investor is average simply because he (or she) does not know why he invests in things. Below, you will find out why buying silver or why investing in silver might be a good (or bad) idea, depending on your take of the market.

Why Buy Silver – Inflation

One of the primary reasons people invest in silver (and all precious metals) is to protect against inflation. Since silver is fairly rare and highly valued for jewelry and industrial practices, it will always be valuable, regardless of the economic climate.

In particular, when your country’s market is doing poorly, your government’s currency tends to become less valuable compared to other governments, resulting in a devaluation of the currency you are holding. Alternatively, the government may issue more money. More money in the general population means the price of everything goes up, also resulting in inflation.

The idea is that silver is silver, and will always be silver. If your currency (cash) becomes less valuable to inflation, it just means that you can trade in your silver for more cash (the price of silver and other precious metals inflates just like the price of everything).

However, there is a little more than understanding inflation to learning why investing in silver is appealing for some investors.

Why Invest in Silver – Market Size

Gold is the “gold standard” for investing in precious metals (shocking, I know). That means that the average investor tends to want to use gold to protect against inflation rather than silver.

Investors only decide to buy silver if they suspect that the silver market in particular is going to move up in comparison to the gold market. Why might this happen?

The primary reason for this is the small size of the silver market. There is twice as much gold available to invest in as compared to silver, and over the last 20 years gold has been 20-100 times more expensive than silver. The end result is that the silver market is extremely small compared to the gold market.

This leads to volatility. You are much more likely to get a huge swing in the price of silver than you are in the price of gold. This could lead to amazing profits or terrible losses. There are a few primary things that drive the price of silver:

• Supply and Demand. A lot of silver coming out of mines today is used for industrial purposes rather than being converted into bullion. If silver production drops off below industrial demand, this could help spike silver prices. You also have to consider investment demand. Since there is a relatively small supply of silvers, a few powerful investors can really drive the price up if they are bullish on this market.

• Inflation. As mentioned, the higher the percentage of annual inflation, the higher the prices of silver tend to rise.

• State of the Market – Due to the 2008 recession, markets were crashing and the interest rate paid out by bonds was very low. This makes silver a very appealing investment, which is why over the next few years the price exploded.

Why Buy Silver – Protection

Another reason people buy silver is to be diversified. A lot of people are heavily invested in precious metals and tend to invest in all types of metals. This is because the gold bubble may burst without a rapid drop in the price of silver. This is why buying silver might be a good idea if you are already invested in precious metals.

However, putting all of your money in silver is seen as an extremely risky move. Additionally, even dedicating the entire bullion portion of your portfolio to silver and silver alone is considered a moderate-high risk move, given the historical volatility of the price of silver.

Why Buy Silver – Investing The Safe Way

Now that you know why buying silver may be a good or a bad idea, there are typically two ways which tend to be considered the “safe” way to invest in silver:

If you think the stock market will do poorly over the next 5 years and inflation will continue to rise, you might invest 20% of your portfolio in precious metals. Out of that 20%, you might move more or less into silver depending on the research you’ve done on different precious metals (some in silver, some in gold, etc).

If you think the stock market will improve over the next 5 years, you might only put 10% of your portfolio in precious metals. This would be an “insurance policy” against a complete collapse in the market rather than an investment made for profit.

Some investors really made out big in the 2007-2011 time period by putting a lot of money into gold and silver when the price was low, predicting a collapse in the market. Putting 20% or more of your wealth into precious metals is seen as a large risk, though if the times warrant it, it could be a brilliant move. However, most investors stick between 10% and 20% of their worth into precious metals depending on how they feel about the market. If you are just now learning how to invest, you would be hard pressed to find an investing coach who would recommend going beyond a combined total of 20% of your wealth in precious metals.