Should you invest in silver as an inflation hedge?

Silver can help diversify an investment portfolio, but as an inflation hedge it's had mixed results.

  • By Wayne Duggan,
  • U.S. News & World Report
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Unprecedented government spending, supply chain disruptions and global energy shortages have sent prices soaring in 2022. Americans are understandably concerned about how to mitigate the damage of inflation that has been running at multi-decade highs throughout the year.

Unlike fiat currencies, there is a limited global supply of silver. In addition, silver has held value around the world for centuries, and it has a wide range of uses that should help maintain demand over time. Unfortunately, silver has had a mixed performance as an inflation hedge in history.

If you're thinking about investing in silver as an inflation hedge, here are several elements to consider:

  • What is silver used for?
  • Silver price history.
  • How to invest in silver.
  • Silver stocks and ETFs.
  • Is silver a good inflation hedge?
  • Is investing in silver a good idea?

What is silver used for?

One of the most obvious selling points for silver as an investment is the large number of uses it has. Silver is used in bullion and legal tender coinage around the world. It is also one of the most common metals used in jewelry. Silver has a wide range of industrial applications as well. More than 36 million ounces of silver are used each year in auto manufacturing. As recently as 2019, the photovoltaic sector accounted for about 10% of total silver demand, or about 98.7 million ounces. Each solar cell uses an average of around 111 milligrams of silver. Silver is also an extremely common component of electronics and is used in soldering and other industrial applications.

Silver price history

Over the past century, the price of silver has increased nearly 30-fold, from about 68 cents per ounce in 1922 to $18.68 per ounce as of Aug. 30. In fact, the price of silver has even risen about 67% over the past 100 years on an inflation-adjusted basis, meaning the price of silver has significantly outperformed the U.S. inflation rate.

Unfortunately, the price of silver has been far from steady over time, even on an inflation-adjusted basis. The price of silver dropped as low as $5.31 in 2022 dollars in 1931 during the Great Depression. It also dropped as low as $7.04 in 2022 dollars in October 2001 during the economic downturn following the 9/11 terrorist attacks.

The price of silver also had several major booms and busts in the past century. It reached its all-time inflation-adjusted high in 1980, thanks to Bunker and William Hunt attempting to corner the global silver market. The Hunt brothers eventually purchased roughly 100 million ounces of silver, driving its price as high as $52.50 per ounce in January 1980, or about $169.50 in 2022 dollars.

Silver prices also spiked in 2011 due to concerns over the Federal Reserve's quantitative easing program and geopolitical instability in Europe following the global financial crisis of 2008 and 2009. Silver reached an inflation-adjusted peak of around $64 per ounce in 2011.

How to invest in silver

One popular way to invest in silver is to invest in the metal itself. Investment-grade silver bullion is 99.9% pure silver. Investors can buy silver bars ranging in weight from 1 ounce to 100 ounces. Investors just dipping their toes into investing in silver should start out buying smaller-weight bars because they may be easier to sell in a difficult market. Investors can also buy bullion coins: The U.S. Mint produces 1-ounce American Eagle Silver Bullion Coins annually.

Investors can also buy so-called junk silver coins. Prior to 1965, all dimes, quarters and half-dollars issued by the U.S. Mint contained large quantities of silver. While many of the coins themselves have no collectible appeal, they maintain value tied to their silver content.

Any investor buying silver bullion should be sure to use reputable, well-established metals or coin dealers, such as JM Bullion, APMEX and SD Bullion.

In addition to buying silver coins, investors can invest in silver by buying silver futures contracts. Silver futures contracts are exchange-traded contracts in which the contract buyer agrees to buy a standardized quantity of silver at a predetermined price on a future delivery date. Each silver futures contract represents 5,000 troy ounces of silver. Futures contracts are a popular way for investors to speculate in the silver market or hedge their portfolios. The contracts provide direct exposure to physical silver without the hassle of delivery or storage because futures contracts can be easily sold at any time prior to expiration.

Silver stocks and ETFs

There are also plenty of ways for investors to bet on silver indirectly via silver stocks and exchange-traded funds, or ETFs.

Investors can buy shares of silver mining stocks. The higher the price of silver climbs, the more profits these silver miners make. Some of the largest, most popular silver mining stocks include Pan American Silver Corp. (PAAS), SSR Mining Inc. (SSRM) and Hecla Mining Co. (HL).

Investors can also buy shares of silver streaming or royalty stocks. These companies don't mine silver directly. Instead, they finance a mining project and receive a portion of its profits. Popular silver streaming stocks include Wheaton Precious Metals Corp. (WPM) and First Majestic Silver Corp. (AG).

In addition to individual stocks, there are several popular silver ETFs and exchange-traded notes, or ETNs. Silver ETFs invest in a diversified basket of silver-related assets, such as silver company stocks, physical silver bullion or silver futures contracts. For example, iShares Silver Trust (SLV) invests in physical silver, Global X Silver Miners (SIL) invests in silver stocks and Invesco DB Precious Metals (DBP) invests in silver and gold futures contracts.

ETNs are debt instruments that operate like a hybrid between a stock and a bond, potentially tempering investor risk. The X-Links Silver Shares Covered Call ETN (SLVO) is a silver ETN that tracks the price of silver and pays a monthly distribution to investors.

Is silver a good inflation hedge?

In 2022, U.S. inflation reached its highest levels in roughly 40 years, but there have also been several other periods of elevated inflation since the beginning of the 1970s.

From 1973 to 1979, oil price shocks and energy shortages led to U.S. annual inflation of 8.8%. During that seven-year period, silver averaged an 80.8% annual gain. Even after removing silver's Hunt brothers-fueled 434.8% gain in 1979, silver averaged a 21.8% gain from 1973 to 1978, more than double the average inflation rate during that period.

Unfortunately, silver has had mixed results as an inflation hedge since the 1970s. From 1980 to 1984, inflation averaged 6.5%, but silver prices fell 22.6% annually during that period. Inflation averaged about 4.6% from 1988 to 1991, but silver prices dropped 12.7% annually during that time.

Since April 2021, the monthly U.S. consumer price index reading has averaged a year-over-year gain of 6.8%. Since April 1, 2021, the price of silver is down about 25% overall.

Is investing in silver a good idea?

Because silver has a relatively weak correlation to stocks, bonds and other commodities, it can help diversify an investment portfolio. Experts vary in their recommendations for how much investors should allocate to gold and silver, but a good rule of thumb is to allocate about 5% of your portfolio to commodities as a whole. Of course, that allocation could be higher or lower based on your specific goals and investment horizon.

Owning physical silver is also satisfying and can be reassuring to investors who do not trust banks and financial institutions. Physical silver is also weatherproof and can survive floods and fires. However, physical silver can also be stolen or lost if it is not stored properly.

Over the past 100 years, the price of silver has risen significantly on an inflation-adjusted basis. But silver's long-term returns have fallen well short of the long-term returns of the S&P 500 (.SPX), which has generated consistent 30-year rolling annual returns of between around 8% and 15% in the past century. Silver has also been very volatile in the past, and its past performance during periods of elevated inflation is extremely inconsistent.

Over extremely long periods of time, silver has historically served as an effective hedge against inflation. However, in any given year or decade, silver may not be the best way to protect your portfolio.

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