It is a known fact that
gold is a popular investment option for
market players seeking a safe haven. Still, silver also has the potential to
protect you against volatility and economic turmoil, on top of providing a
hedge against high inflation.
Here are a few things
you need to know about investing in silver, including what affects its price
and the benefits of holding this precious metal.
Factors
Influencing the Price of Silver
Like other precious metals,
the price of silver is mainly affected by supply and demand.
Silver has several
industrial uses, from electronic devices to solar panels to electric vehicle
(EV) components to medical equipment.
Both gold and silver
have limited supply, but research has shown that there are more than 1.7
million metric tons of silver around the globe. That’s compared to the 244,000
tons of gold found worldwide.
Due to silver having
more supply than gold, this particular precious metal has been unable to hit
$50 per ounce, compared to gold’s peak of more than $2,000 per ounce.
Setting the
Price of Silver
Regarding setting the
price, the London Bullion Market Association (LBMA) determines the silver’s
benchmark price. The fixed price is set every day when the group’s members
decide on a price, usually for big orders, that aligns buyers with the sellers.
The metal’s spot price
is set in real-time and represents the buying and selling of silver bullion.
Silver also has an
inverse relationship with the US dollar since it is denominated in that
currency. So if the greenback declines against other peers, silver becomes more
affordable, which could increase demand and raise its price.
Reasons to
Invest in Silver
Here are some reasons
investors would consider putting their money into silver.
To Safeguard
Real Value
With inflation at an
all-time high, you need to figure out a way to preserve the real value of your
wealth. That’s because inflation can gradually reduce the real value of money
over the long run, making your $50 incapable of purchasing as much as it could
years ago.
Investing in silver is
one way to protect your wealth’s real value from the impact of inflation. While
consumer prices are high or increasing, the demand and prices of precious
metals, including silver, tend to go up.
However, silver is not
known to be a consistent hedge against inflation. Moreover, if high inflation
meets economic recession, lower production could point to a complete decline in
the demand for this precious metal.
Safe Haven
While interest rates
and money supply drive a currency’s value, silver’s value is more supply- and
demand-related. That makes silver another popular safe-haven asset for
investors during geopolitical and economic volatility in the financial markets.
In the three months
through August 31, 2020, silver prices rose 140% as investors turned to
safe-haven assets for protection against the COVID-driven impact on global
stock markets. The precious metal also gained 10% two weeks after Russia’s
attack on Ukraine.
Diversification
Silver also has diversification benefits similar to
shares, real estate, bonds, and cash. In investing, diversification is vital to
keeping you safe from severe risks and detrimental losses when one type of
asset, such as shares in your portfolio, declines.
However, note that
compared to gold, silver has yet to show the inverse relationship that stock
markets have with the yellow metal. That means the price of silver doesn’t
regularly increase when the stock markets are down.
