Silver is a precious metal, and like gold, it has an intrinsic value. Silver is widely perceived to be both a commodity and a form of money, and it has been used as a medium of exchange for thousands of years due to its inherent value.
Milton Friedman said that the “major monetary metal throughout history is silver, not gold.”
Silver also has number of unique characteristics, such as malleability, thermal and electric conductivity, and a resistance to corrosion, which allow it to be used in many important industrial, telecommunications, medical and energy technologies. This industrial demand underpins stable global silver demand.
A lot of silver is used in small quantities in devices such as mobile phones can be less economical to recycle as opposed to gold. So less silver is recycled, thereby creating the need for more primary mine supply. Overall, silver industrial and investment demand continues to increase significantly while meanwhile supply is falling.
Money in the U.S. Constitution is defined in terms of silver. Article I, Section 10 of the U.S. Constitution states that no State can “make any Thing but Gold and Silver Coin a Tender in Payment of Debts”, in other words, only gold and silver coin can be legally used as money. The Coinage Act of 1792 specifically defined the U.S. dollar as “three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
Silver is a Tangible Asset and Important Diversification
Like gold, silver is part of the precious metals asset class, and can act as a hedge against inflation and a portfolio diversification technique to mitigate geopolitical, monetary and systemic risks. Like gold, silver is a store of value and has retained its purchasing power over long periods of time.
It has been shown in numerous academic studies, including by the highly respected portfolio and asset allocation experts, Ibbotson and Associates, in a June 2005 study, ‘Portfolio Diversification with Gold, Silver and Platinum’, how silver, and indeed precious metals, are the only one of the seven asset classes with a negative average correlation to the other asset classes. It is also worth noting that the authors showed that, excluding cash, precious metals are the only asset class with a positive correlation coefficient with inflation, which is further evidence that precious metals act as a hedge not just against macroeconomic and systemic risk but also against the long term threat of inflation.
The Ibbotson study wrote that “The three metals were chosen because gold and silver are often viewed as a safe harbor in times of crisis. Conversely, during economic expansion demand for silver and platinum is thought to increase.”
According to Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15% allocation to gold, silver and platinum.
Silver is more affordable than gold, and investors in silver can accumulate more silver than gold, dollar for dollar. Also, silver is more affordable as buyers can dollar cost average into a position through regular small purchases. Psychologically, this makes the purchase of silver more achievable for small investors since $1,000 can buy up to 50 ounces of silver but not even one ounce of gold.
