Silver and gold have been recognized as wealth for over 5,000 years. Today most silver investors are not really investors in the traditional sense; they are people with and understanding and knowledge of history. David Morgan believes that silver is an investment in seeing clearly how the world works. In this first chapter of his five-part Guide to Silver Investing, he introduces some key concepts. Read on…
How is investing in silver similar or different to investing in gold?
Silver investing is similar to investing in gold from the monetary aspect; meaning that silver has all of the monetary qualities that gold has from a classic perspective. It is fungible, divisible, possesses intrinsic value, is a store of wealth, and a means of final payment.
Many in North America think of silver as only being an industrial metal and yet silver is both a monetary metal and an industrial metal. Because silver is "indispensable" in the modern world, it becomes price inelastic for many applications. This means that no matter how high the price of silver goes, industry will still use silver because nothing else can replace it.
Silver has been used for money for longer periods of time, by more people on the planet, and in more places than gold. In fact, the word for money and silver are identical in the romance languages and in the Torah. To me, the 5% or 6% of the world's population arguing whether silver is money or not hardly matters; the market will make the final decision and when Mexico, South America, and Asia are all scrambling to protect whatever little savings they have left, the silver market will explode, regardless of anyone's belief.
What should an investor look at in considering silver vs. gold?
There are many reasons, but in my view, two are primary. First, to diversify within a precious metals portfolio. Second, silver has added risk but also more potential, in my view. So by adding silver an investor has an added "kicker" of a more volatile holding that can reaper greater rewards.
Can you explain the silver/gold ratio and how investors should use that ratio when investing in silver?
Basically, this ratio illustrates how many ounces of silver are required to buy one ounce of gold. Right now the ratio is about 70-to-1. This means it takes 70 ounces of silver to purchase one ounce of gold. When I called (accurately) the beginning of this silver bull market, the ratio was at 80-to-1 and over time it drifted to around 50-to-1. This proves that silver did outperform gold for a few years, however, during the recent "cash crunch" many investors, hedge funds, money managers, institutions, banks, and brokers were dumping everything to get to U.S. dollars to meet redemptions and margin calls. During this time gold fared better than any asset class, including silver, and the ratio shot up near 90-to-1.
The ratio can be used as a trading indicator and personally, I do this, as do some of our consulting clients. In fact, I did put this trade on when the ratio was about where it is now, only to see it shoot up further. I expect the ratio to come back toward the 50-to-1 area over the next 18 months.
Over time I expect to see the ratio move toward the classic or monetary ratio of 16-to-1, or in fact, during the top of this bull market we might see a 10-to-1 ratio. No one really knows, but since silver is much more affordable than gold and there are about 2 billion ounces less available now than when silver hit $50 in January 1980, it seems reasonable that many factors are lining up for silver to shine brightly in the future.
What are the primary ways individuals can invest in silver? (Buying the physical metal, ETFs, mining equities)
We provide a hierarchy: First and foremost, physical silver and gold, too. This is the bedrock or primary basis of a precious metals portfolio. After that, you can move into a higher risk-to-reward profile and that would be your mid- to top-tier mining companies. After that come junior mining companies, and finally, the rank exploration stocks searching for wealth in the ground.
ETFs are primarily for institutional or very large investors and I have addressed this in much greater detail on our website www.Silver-Investor.com. Anyone interested can read the Morgan Commentaries and get my full perspective on the gold and silver ETFs.
The most dangerous yet potentially rewarding are futures and options—this is for risk capital only and generally is advocated for seasoned investors of high net worth who can afford to risk some money for potentially very large gains. Most beginners lose money here—even though their fundamentals may look good.
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A precious metals aficionado armed with degrees in finance and economics, as well as engineering, David Morgan founded the silver-investor.com website and The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals. In addition to The Morgan Report, David writes Kitco's weekly Money, Metals and Mining Review. His articles have appeared in The Herald Tribune, Futures Magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, The Wall Street Journal and (of course) The Gold Report.