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Is silver a good investment?
December 21, 2007 6:40 AM   Subscribe

With the US economy apparently getting ready to go 'foom!', a friend of mine has become very excited about silver as an investment.

So apparently the great thing with silver is, it's seriously undervalued at the moment, due to ages of behind-the-scenes manipulation to keep the price artifically low, which is now getting ready to 'splode and send the price from $14/oz to $100/oz or more, and furthermore even if it doesn't, it's certainly not going to get any cheaper, so the worst possible scenario is breaking even. Plus the fact that it's hard value and not "fiat currency", and it's necessary to get the hell away from US dollars and the stock market, because everything's going to burst into flames any day now, he says. He's in the process of converting his savings into a safe-deposit box full of silver. Though I sound flippant, he's actually very convincing... but he's self-educated in these issues, so I'm hoping AskMeta has some more experienced economists.

At the moment, I have no retirement fund, but I do have about $23 grand in a mutual fund. I'd been thinking about cashing out some of it to start an IRA anyway, but given the current economic situation, what should I do? Should I get my money out of the fund and away from the stock market? And do what with it? IRA? Is an IRA safe if the US goes mega-inflation? Is that likely to happen? Should I buy a pantload of silver bullion and bury it in the yard? I don't know anything about any of this grown-up crap. Help!

(posting anonymous for reasons of not discussing my finances with strangers)
posted by anonymous to Work & Money (31 answers total) 2 users marked this as a favorite
 
Where is your friend getting these numbers on the explosive financial power of silver? My guess is that it isn't from a disinterested third party.

The US isn't going mega-inflation, and what you are feeling is the common worry that drives most people to sell low and buy high. Keep your assets where they are. You want to sell from a position of strength, not worry and panic. Now, if you want to invest new money in silver, that also follows a good investing axiom of "Never try to catch a falling knife", but I wouldn't take money out of your current investments to do it.

The US is a massive market, and the per person productivity is among the highest in the world. The countries that are significant holders of US currency cannot afford to dump their holding since it would destroy their equity as well as cripple their export ability to the US. China, for example, has a vested interest in a strong dollar since it allows us to buy all the stuff they desperately need for us to buy it. There's not another market that soaks up Chinese goods like the US.

Stop listening to your friends and turn off the talk radio. We're going to be fine. The sky isn't falling.
posted by grumpy at 6:53 AM on December 21, 2007 [1 favorite]


We're in very precarious times, financially, and your friend is not insane. That does not mean, however, that he will be correct.

Very short form of what I've written about at length on MeFi and elsewhere: the Fed, for many years, has been papering over any problems we had, refusing to allow us to ever go into recessions of any type. This has caused severe maladjustments in the American economy. They have also aided and abetted the idea of 'structured finance', this gigantic pyramid of derivative structures. The derivatives often trade like normal assets (like, for instance, house loans, which are securitized, resold to banks, and then used as reserves to make more loans against.) This huge influx of money-like things has, without any understanding by the Fed at all, caused prices in many areas to go through the freaking roof.

They're starting to collapse now, and in that collapse I believe we are facing the most terrible economic catastrophe since the Great Depression. The Fed and other central banks are desperately trying to prevent the collapse by providing huge amounts of liquidity. In essence, they are trying to turn the 'fake' money securities into 'real' money, at least as real as modern money ever gets.

If they succeed, your friend is probably correct; we'll go into a wild inflation and commodities will go to the moon. Silver is likely to do very well, as there's not much world storage of the stuff left, and demand will increase dramatically as economies respond to the inflation (it's a metal heavily used in industry.)

But if they fail, the prices could drop to remarkably low values, as we go into a deflationary debt collapse. Everyone will be scrambling around for 'real' money, and prices will drop precipitously for quite awhile. Commodities of all sorts will maintain SOME value, but silver in particular is likely to be hit very hard, because industry demand will drop a great deal. There's still quite a lot of supply in the market, and between demand drying up and the liquidity crunch, the price could go very low indeed.

My guess is that we're going to go into the first scenario, that the central banks will find leverage and re-inflate the economy, but this is purely a guess. So far, it doesn't look like their emergency bailout packages seem to be helping much. If they don't get traction soon, we'll probably deflate instead.

The straight-and-narrow path is still a possibility, but the derivative structures are so enormous, and so unstable, that it's my belief that, eventually, we HAVE TO fall off to one side or the other; we either realize they're a bad idea and take deflationary lumps as they evaporate, or we don't admit they're a bad idea and try to inflate them into liquidity. That second approach will, of course, just make even more derivative structures and cause even more money-like things to chase goods.... so eventually that will start us toward hyperinflation and a Weimar-Republic style outcome.

But which way will we fall off the straight and narrow? I really don't know. I'm guessing inflation, because the Fed, while long-term stupid, is short-term clever. But I could easily be wrong.
posted by Malor at 6:57 AM on December 21, 2007 [7 favorites]


it's certainly not going to get any cheaper, so the worst possible scenario is breaking even

I don't follow metals closely, but I'd begin by wondering what evidence you have in support of the claim that "it's certainly not going to get any cheaper." If you're wrong about that, the worst possible scenario is that silver becomes worthless and you lose all of your money. It's very unlikely to become completely worthless, mind you, but if you want "worst case scenario," that seems to be it. I wouldn't be so sure it's not going to continue to fall.

IRA? Is an IRA safe if the US goes mega-inflation?

An IRA is an account, not a security. There are different tax laws that apply to an IRA as compared to ordinary accounts, but whatever you're invested in within the IRA is subject to the same risk as it would be otherwise. If you keep all your money in the IRA in cash, that's subject to the same risk as any other cash account. If you have stocks in your IRA, they're subject to the same risk (potentially losing it all) as stocks in any other account. An IRA doesn't magically protect you from risk, it only magically protects you from (some) taxes, with the specifics dependent on exactly what kind of IRA you have.

Should I get my money out of the fund and away from the stock market?

My personal approach has been to stay in stocks, but shift the balance more towards international stocks and away from US stocks. Whether this is a prudent approach, only time will tell. Also, I'm in it for the very long term--I don't expect to need that money for ~20 years. If you have a shorter or longer time frame, that may well affect your decisions. IANAFA (financial advisor).
posted by DevilsAdvocate at 6:58 AM on December 21, 2007


As always, diversity in your investments is key to long-term stable growth.
posted by blue_beetle at 7:02 AM on December 21, 2007


Who says the US economy is about to go 'foom'? I'd wager it would be someone interested in Gold, Silver, etc.

GDP growth in the US this year has been good. The entire planet just about is in a worldwide boom. Why is the US economy going to be in trouble during this time? And what makes silver so special?

I'm with grumpy above. Stop listening to talk-shows, info-mercials, and sky-is-falling blogs. Economies have ups and downs, and today is no different. Besides, if you wanted to take a chance on speculation, you might as well go with the peak-oil guys and buy oil futures.
posted by eas98 at 7:03 AM on December 21, 2007 [2 favorites]


Here is a good tale about investing in silver.
posted by TedW at 7:05 AM on December 21, 2007 [1 favorite]


As someone who does this for a living I will tell you that putting your whole nut into silver is unambiguously a bad idea.

It is possible that both the US will go into a severe economic downturn (so you would expect stocks to do poorly) and inflation will accelerate dramatically (so you would expect bonds to do poorly). The chances of either of these things happening is about 1:10 (maybe 2:10) the chances of both happening is 1:100 (maybe 2:100).

But if thats really what you are worried about, fine. Silver is still a bad investment. Stocks and bonds are calls on future cash flows, coupon payments or dividends, silver has no cash flows and just costs you money (at least to store it and insure it). Silver is mainly used in industrial processes and by construction (you are assuming a recession) there will be much less demand for its main use.

If you are worried about the major stagflation scenario you and Malor discuss, try US Treasury Inflation Protected bonds, TIPS.
posted by shothotbot at 7:25 AM on December 21, 2007


If you think the government won't freak out too much (ie, bad economy wouldn't lead to a new government and asset seizure), you can just invest in an ETF that tracks the metal. Nice and easy, no robbery risk (or bank fees), and much more liquid. It probably couldn't hurt to diversify your portfolio some, just pick some small percentage and go for it as a hedge.
posted by cschneid at 7:26 AM on December 21, 2007


If you think the government won't freak out too much (ie, bad economy wouldn't lead to a new government and asset seizure), you can just invest in an ETF that tracks the metal. Nice and easy, no robbery risk (or bank fees), and much more liquid. It probably couldn't hurt to diversify your portfolio some, just pick some small percentage and go for it as a hedge.
posted by cschneid at 10:26 AM

If you simply must do it, an ETF is the way to go. You still pay the bank & insurance fees, of course. Plus fees to the guy who runs the ETF. And of course it will hurt your portfolio if the price goes down.
posted by shothotbot at 7:30 AM on December 21, 2007


If you look at the prognosticators, there are those that call for gold to go as high as $2000 within a few years, and others predicting a drop to $200 in the same time period. Silver as a precious metal will tend to track gold, with the proviso that the photography industry used to be a major user in the pre-digital age. The demand for that has obviously dropped, so one could make an argument that the value of silver is based on reputation, not it's actual or practical value. (The same argument could be made for gold too.)

Likewise, the actual predictions for the US dollar and economy, while not as bullish in the short term as CNBC and the WSJ are preaching, are nowhere close to as catastrophic as being pushed on the infomercials.

If your friend wants to put all his eggs in one silver basket, he'll either make a fortune, or lose one. If hes concerned about the US dollar collapsing, and wants silver, buy some hard silver, buy silver ETFs, (a stock that tracks the price of silver), and some shares of silver companies that trade in Canadian dollars, Australian dollars, or other currencies.

But that probably wouldn't protect his investments as much as some precious metals investment, (no more than 10% of his portfolio if he's really bullish on it, and that's still twice as much as recommended), along with some good diversification in other markets and global companies that do a good chunk of their business in foreign currencies - McDonalds for example.

Besides, if the world economy really collapses, then his silver supply is worth only what he can exchange it for, until some guy with a gun knocks on his door. But what is most likely to trigger this would be something drastic in the middle east, in which case burying barrels of crude oil and gas in the backyard would be of more use.


disclosure - I do work in the investment field, but IANA Financial Advisor, and neither your advisor nor your friend's. This is not advice, and should not be considered as such.
posted by Chuckles McLaughy du Haha, the depressed clown at 7:46 AM on December 21, 2007


Nth-ing everyone who says something to the effect of 'don't put all your eggs in one basket.'

please keep in mind that some times with metals the people who are telling you to buy them are the same people selling them to you. always seek out a reputable firm. shop around, prices vary.

standard disclosure: this is not advice.
posted by uaudio at 7:48 AM on December 21, 2007


I don't know anything about any of this grown-up crap.

Then don't fuck around with it. Hand it over to money managers who do know about this grown-up crap.

Check with the people who manage your mutual fund and see if they have retirement products that are more diversified than single mutual funds.

I work in higher ed, and like a lot of us I use TIAA/CREF. They have products that are shifting investment packages targeted towards retirement dates, including stocks, bonds, real estate, all kinds of crazy shit you ain't never heard of. I haven't the foggiest where exactly my retirement money is going now, except into a retirement account targeted for (IIRC) 2035. Why? Because if I were managing it directly, I'd probably do something stupid like throw $23,000 into silver anytime I saw a minor down-tick.

Anyway, you might check and see if your mutual-fund people have something similar.
posted by ROU_Xenophobe at 7:48 AM on December 21, 2007


The answer to "should I invest in (some shit I know nothing about)??" will always be NO.
posted by almostmanda at 7:59 AM on December 21, 2007 [11 favorites]


Silver is high now, but it's had periods where it just did nothing for five years, and you would have been better off putting your money in savings accounting.
posted by smackfu at 8:07 AM on December 21, 2007


Why don't you head over the The Silver Institute and check out the historical prices for silver? This graph shows that in the past 30 years, the highest price for silver was ~$20. It's trading below that now, so if you bought an ounce of silver in 1980, you'd have lost ~$6 on the investment if you still owned it. Compare that against the stock market over the same period. There's no comparison. Over the long term precious metals are a loser, especially when you factor in inflation, which is what you want to protect against. Over the short term, you don't seem to have the knowledge or the will to invest in something as relatively volatile and low-yield to your advantage.
posted by OmieWise at 8:09 AM on December 21, 2007


Those numbers sound exactly, and I mean exactly, like a commercial I saw yesterday for the Franklin Mint selling some old U.S. silver coins. See a certified finanical professional for details on getting a real retirement package with that $23k.
posted by Ironmouth at 9:09 AM on December 21, 2007


Is an IRA safe if the US goes mega-inflation? Is that likely to happen?

No. Come down off the ledge. The U.S. economy is not about to go "foom." Many people have a hard time grasping the enormous size and resilience of the U.S. economy in relation to historical trends and the rest of the world. Put your money with a reputable money-manager, come back in 20 years, and you'll be wealthier.
posted by Cool Papa Bell at 9:44 AM on December 21, 2007


it's never a good idea to put all of your investments into one asset class
posted by Salvatorparadise at 9:44 AM on December 21, 2007


Have your friend do some googling on Nelson Hunt. When you're the son of the richest man in the world, it takes a lot of effort to go bankrupt.

That's disregarding that no time in modern history would an investment in silver be a good idea. Over any arbitrary time series, you'll find that almost anything will have a better rate of returns. Except in the cases of bubbles (which are by definition symmetrical, even though their movement may be asymmetrical), and in those cases there is a complete inability to predict to their inherently unstable nature.

Not that it could never happen, the sun could not rise tomorrow. If the economy goes worse than the great depression, I would not want to be known as the man who has a box of silver under my bed.
posted by geoff. at 9:47 AM on December 21, 2007


I am not a financial adviser. But my general take on investments is that we have efficient markets (which is generally a capital markets concept, but...), and you or I or anyone else who is not one of the Masters of the Universe should not be chasing some hot idea about where the market is moving. The winning plays have been made, and many a naive investor has lost much by thinking they can make a meal out of the remaining crumbs.

Suffice it to say, if you are asking this question on an Internet Q&A thread, you are not among the sophisticated investors who have already positioned themselves to take advantage of the circumstances from which you or your friend intend to profit.
posted by Admiral Haddock at 10:12 AM on December 21, 2007


Bullion is a funny thing. As others have mentioned, it doesn't do anything for you - no income, no dividends, no interest - and it's not good for much. Silver has more industrial applications than gold but not all that many.

Because of the intrinsic value it has, storage is an issue. Do you keep it at home? You could be burgled and the bullion taken away. For reference, $23 grand of silver at a spot of 15 weighs about 105 lbs and occupies 4500 cc. That's a pretty big safe deposit box - expensive - and it's hard to truck that much bullion around. Also I doubt the bank would allow you to store 100 lbs in one box that size.

Finally bear in mind that in the worst case scenario - the one that your friend seems excited about - there's a run on the banks. That means they lock their doors and post armed guards. Your bullion is in there. Do you think they'll let you in to get at it while people are rioting outside? If they do, do you really want to carry 100 lbs of bullion through the rioting crowd? Think they'll just let you walk past? In fact, do you really want to truck bullion around every time you make a transaction?

There is a silver bullion ETF - it's called SLV. The cost of owning it is 0.5% annually. You're actually buying some silver when you buy a share, it's stored in a vault somewhere and you will never see the actual metal you own. Another nice thing about this is that you can hold it in an IRA without difficulty, which is not true of bullion you keep at home or in a safe-deposit box. (That kind of bullion can actually be held in your IRA, but only with difficulty and added expense.) Bear in mind that if you do this in a traditional IRA, you're swapping capital gains tax for an eventual income tax hit, which may not actually be advantageous to you.

The market on silver can be and has been cornered - I remember that; my youthful self was a holder of 10 troy oz. of bullion when the Hunts drove the price up to $75 (intraday) - but many other stores of value are susceptible to this. Hedge funds can manipulate stock prices, gold was kept artificially low through much of the 90s due to Russia's dumping of its reserves, all sorts of political factors affect the value of these things.

TIPS are held hostage to the cooked CPI figures issued by the government; I wouldn't hold a TIPS on a bet, which it essentially is - a bet that the government will represent CPI inflation to their disadvantage and to your advantage.

Is an IRA safe if the US goes mega-inflation?

An IRA isn't an investment; it's a legal vehicle that helps you shelter an investment from certain kinds of taxes. How the underlying investment performs during periods of mega-inflation doesn't bear any relation to whether or not you're holding the investment inside or outside of an IRA. Actually, I think if you have $23000 and you choose to ask this question this way, you probably don't know enough to manage your own financial affairs and could benefit by consulting a financial adviser.
posted by ikkyu2 at 10:22 AM on December 21, 2007 [1 favorite]


I'm not saying this is your situation, but generally - everyone I've ever heard who heard this plan to strike it big on one investment, put it all in X which is about to explode, it always turns out the friend is from Nigeria, or was met online in an AOL chat room, or some such, or also has a bridge over in Brooklyn they're willing to sell cheap, etc. I can't offer any concrete analysis other than a funny feeling about this one.
posted by bunnycup at 10:32 AM on December 21, 2007


Silver can be, and has been, manipulated, in which case lots of people lose their investment. If you believe the US is going to experience economic end times, silver or copper coins might be useful currency. US coins were silver before 1964(?) and copper before 1973(?). Personally, I think this is unlikely.

But almost every ordinary investor will do best by reducing credit card debt, and having a balanced portfolio. There are people who do financial analysis fulltime, who are well-trained, who pay attention to it as their job. Friends-of-friends are unlikely to do better.
posted by theora55 at 10:50 AM on December 21, 2007


TIPS are held hostage to the cooked CPI figures issued by the government; I wouldn't hold a TIPS on a bet, which it essentially is - a bet that the government will represent CPI inflation to their disadvantage and to your advantage.
posted by ikkyu2 at 1:22 PM

I am pretty sure that the only research about biases in CPI which did not come with a free tin-foil hat said that it was too high, because of the substitution effect. If CPI was overestimated then that would be a good thing for a TIPS buyer. I am open to correction if anyone knows of an academic study I am not aware of.
posted by shothotbot at 10:54 AM on December 21, 2007


The information your friend is listening to is pretty much identical to a line that was going around in the late eighties (and has probably been around the block a time or two in between). I mean, identical: price is artificially depressed, set to explode, nowhere to go but up. Guess what? The price went down. It bottomed out around $4.00 an ounce around '01. Right now it is around $14 an ounce. Nowhere to go but up? Absurd. The second through forth largest markets for silver (after industrial applications) are photography, jewelry and silverware, and coins and medals (in the U.S. photography is the second largest market, worldwide it is the third). Guess where that market from photography is headed in the digital age? That market has been in decline for five years straight. How do you think those jewelry, fancy silverware, collectible coins and medals markets are likely to fare in the event of a serious depression? There are potentials for emerging markets, but you have to be wary of these things if you're considering an investment. They're talking about replacing platinum in catalytic converters with silver, for example. Guess what? They were talking about the same research in 1998. Maybe in another ten years, huh?

I think it entirely possible that silver is at the top of a largely artificial bubble and the reason the silver hedge hucksters are out jiving people like your friend again is that they're looking to get while the getting is good, and your friend is about to take a bath and lose about half his investment. Am I right? Nobody knows. There are no guarantees in this kind of thing. I think the advice of not trying to be creative and out-think the market if you don't know anything about this sort of thing is the best. Get a financial planner, start putting as much money as you can into tax-deferred retirement options, then stop paying attention to the ups and downs, because there's nothing you can do about the Market.
posted by nanojath at 10:58 AM on December 21, 2007


@grumpy

"The US isn't going mega-inflation"

What is mega-inflation? Inflation is currently at 10 percent (NO, not measured against a random basked of goods but taken the M3 money supply increase as an indicator). This could only be prevented by increasing interests. If the FED increases interest rates then I would assume that several major banks would have to file for bancruptcy.

"The US is a massive market, and the per person productivity is among the highest in the world."

Yes, the per person productivity but not the per hour productivity...

"The countries that are significant holders of US currency cannot afford to dump their holding since it would destroy their equity as well as cripple their export ability to the US."

No, they will try to get rid of them and buy equity. China is currently exactly trying this.

"Stop listening to your friends and turn off the talk radio. We're going to be fine. The sky isn't falling."

You should always listen and then make your own conclusions.
posted by yoyo_nyc at 11:12 AM on December 21, 2007


"The US isn't going mega-inflation"

What is mega-inflation? Inflation is currently at 10 percent (NO, not measured against a random basked of goods but taken the M3 money supply increase as an indicator). This could only be prevented by increasing interests. If the FED increases interest rates then I would assume that several major banks would have to file for bancruptcy.

posted by yoyo_nyc at 2:12 PM on December 21

The federal reserve stopped calculating M3 a year ago. M2 has increased at about a 6% rate over the last year. And you are coming up with your own definition of inflation. Thats fine, but it doesn't have much to do with anonymous's problem unless you flesh it out a bit more.

You should always listen and then make your own conclusions.

Ah. Some common ground.
posted by shothotbot at 12:16 PM on December 21, 2007


this "invest in silver now" message brought to you by the same people who were trying to sell "investment grade diamonds" in the 70s.
posted by uaudio at 12:22 PM on December 21, 2007


geoff.: Have your friend do some googling on Nelson Hunt. When you're the son of the richest man in the world, it takes a lot of effort to go bankrupt.

Precisely. So learn the lesson he did: whatever you do, don't buy up 50% of the world's supply of silver.

What that has to do with buying up $10k of silver, I don't know.
posted by koeselitz at 1:00 PM on December 21, 2007


What that has to do with buying up $10k of silver, I don't know.

Ah, perhaps I was not clear enough. When he tried to corner the market, the prices went up incredibly, the kind of price increase that you'd expect when evaluating whether to put money in a single asset class. If I were to risk $10k in putting all my money in silver, I would expect to double my profits or more on such a speculative investment.

So let us say that prices of silver DO jump up, and that this $10k is a good idea. What happened last time? Every grandmother in the world that had a silver dinnerware set suddenly saw a down payment on a second home sitting behind glass in their living room. Silver flooded the market and the prices dropped.

Markets do a bad job of conveying things like that.
posted by geoff. at 12:41 PM on December 22, 2007


Robert Kiyosaki on silver as an investment, among other things
posted by bargainhunter at 10:30 AM on March 27, 2008


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