AIER recently published research regarding silver as a potential component of an investment portfolio. Silver was found to have several desirable attributes, but the evidence does not support its inclusion among our recommended asset classes at this time. The emergence of exchange traded funds could have a profound impact on the silver market and we will continue to monitor silver as more data accumulates.
An asset class is a category of assets that provides positive expected returns and also demonstrates unique risk-return characteristics. With the exception of gold, our nine recommended asset classes meet both criteria. Gold provides no means of generating income. However, its price variation is unique, and it serves as a form of money that, unlike fiat currencies, has maintained its purchasing power over hundreds of years.
Silver also has a long history as a medium of exchange, and empirical research reveals several desirable features. Its returns move independently from those of our recommended asset classes, and are also less than perfectly correlated with the returns of gold. Gold and silver respond differently to certain macroeconomic variables as well. All of these characteristics are of potential interest to investors because they suggest that silver could supplement gold as a unique monetary alternative to fiat currencies.
The demand for silver, however, comes mostly from industrial users rather than investors. If this persists changes in the silver price will continue to be influenced by industrial demand, which fluctuates with the business cycle. Like other commodities, and unlike gold, silver supplies get "used up" in production. This suggests a rising price over the long term, but only if demand remains strong. In fact, rising commodity prices have historically inspired innovation, giving rise to substitutes that ultimately reduce or even eliminate demand for the commodity in question.
Valued at roughly $35 per ounce (versus roughly $1,500 for gold) it is prohibitively expensive to store any meaningful quantity of silver. This impedes demand for silver as an investment. This could change with the emergence of silver ETFs, which offer individual investors exposure to the silver price without the need to take physical possession.
We do not recommend silver at this time. Like gold it provides no expected return. But unlike gold, silver does not provide a discernable offsetting "upside." We are not convinced that silver will serve as a reliable form of money. We will continue to monitor both precious metals going forward, along with other potential asset classes, as more data accumulates.
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