USA Today
If you're a gold investor, you have to be worried about an unwonted outbreak of good news. What if the economy doesn't enter hyperinflation? What if peace breaks out, or the world's terrorists scare themselves to death?
Gold rarely thrives on good news, so you might consider adding silver to your portfolio. Like gold, silver is a good investment if paper money collapses. But unlike gold, silver is also an industrial metal, and demand for silver should rise in an economic recovery. As an added bonus: An ounce of silver is far cheaper than an ounce of gold.
Like gold, silver is widely used as a medium of exchange when paper money loses its value. It's a good store of value, and easier to carry around than chickens or canned hams. Silver and gold have been rising in the past few years, and with good reason:
•U.S. government debt is now $8.6 trillion, or $13 trillion if you include intragovernmental holdings, such as the Social Security trust fund. The nation has the option of using a mix of tax increases and budget cuts to reduce the budget deficit and, ultimately, the debt. It also has the option of inflating its way out of the debt. Gold's rise in price reflects the widespread notion that we will use the printing press to reduce our debt.
•The euro has been sinking the past few weeks, as the world tries to figure out if Europe will be able to stabilize its more fiscally creative members, particularly Greece, Portugal, Ireland and Spain. Whenever the future of a currency is in doubt, investors look for an alternative, such as gold or silver.
Gold has soared from $258 an ounce in March 2001 to $1,221 Thursday, a 373% gain. Silver has trailed gold slightly during the same period, rising from $4.30 an ounce to $18.34, a 327% gain. If you buy any precious metal now, you're certainly not getting in on the ground floor. But the metals may still have some room to run. "This is the best environment to invest in precious metals," says Shanquan Li, manager of Oppenheimer Gold & Special Minerals fund. "The worldwide currency problem isn't easily solved."
Industrial uses
Unlike gold, silver also has myriad industrial uses. It's a great conductor, so it's in widespread use in electronics. The chemical industry uses about 700 tons of silver a year, according to The Silver Institute, an industry trade group. And it's an effective antibiotic, useful in water purification, which accounts for its appearance in the portfolio of the Kinetics Water Infrastructure fund (ticker: KWICX).
Should the global economy recover, silver should have some additional upside, says Joe Foster, co-manager of Van Eck Global Hard Assets (GHAAX). "I expect silver to outperform gold, because it has some industrial applications as well," Foster says.
If you're interested in investing in silver, you have a number of choices:
•Physical. The most cost-effective way to buy silver is in large bars, says David Beahm, vice president of economic research at Blanchard & Co., a New Orleans precious metals dealer. Those are a problem if you only want to sell a quarter of your bar, he notes. Most people buy 1-ounce silver coins. "Look for the coins with the lowest premium, whatever that might be — American Eagles or other 1-ounce coins." A premium is the coin's markup from the silver spot price. You can also buy bags of "junk" silver — pre-1965 silver coins — but those, too, are cumbersome. Try hauling around $5,000 in quarters some time.
Bear in mind that you'll have to store your silver somewhere, and that depends, to some extent, on how much you trust your neighbors. If you put your silver in a bank safe-deposit box, your rental fees will eat into any profit.
•Exchange traded funds. Several ETFs now invest in physical silver, which makes the problem of storage much easier. If you're worried about a financial collapse, however, your silver shares won't go far at the corner grocery store.
•Silver-mining stocks. Silver is typically a byproduct of something else, and so there are few pure plays in silver. But silver stocks aren't followed as closely as gold-mining stocks, says Oppenheimer's Li, and that can be an advantage.
One interesting silver stock: Silver Wheaton (SLW), which buys silver production upfront for a fixed cost from miners, typically as a byproduct. Its cost of silver in the first quarter was $4.04 per ounce.
Silver is a highly speculative investment, and if you're worried about taking losses, then you should be investing elsewhere. But if you think the world is in trouble — but are willing to admit you could be wrong — silver is one way to go.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. His book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com. Twitter: www.twitter.com/johnwaggoner.
Good advice on silver!
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