The Silver Edge to Inflation Hedging

There are bright sides to the dark cloud of inflation, and for some investors one of them may be silver.

Silver is generally seen as gold’s sister metal — not as valuable, and not nearly as ubiquitous in terms of demand, but that doesn’t mean it should be counted out of a diverse portfolio.

Because of its precious metal status, silver can be a decent hedge against inflation as its worth is derived differently from paper currencies. Unlike paper currencies, silver cannot be printed, and has a limited supply. When the US dollar weakens (either because of increased money supply or inflation), the silver price tends to rise.

This limited supply posed a problem to the US Department of the Treasury back in the 1950s, when coinage was still made from silver. As the US recovered post-war, demand for industrial silver and coinage both boomed, forcing the treasury to sell its silver holdings to keep the price at its monetary value. If it hadn’t done so, individuals would have had the incentive to melt silver and sell it for a higher price than its monetary value.

Silver is no longer used for general coinage, but it still has great use from an investment perspective. And aside from being a precious metal (and thus a store of wealth), silver has many industrial applications: in batteries, smartphones, glass coatings and water filtration, to name just a few. The industrial use of silver accounted for nearly half of silver demand in 2020 (up 8 percent from the year before,) according to the Silver Institute.

The silver market has seen volatility over the years. Silver hit its highest price (US$48.70 per ounce) in the 1970s on the back of a confluence of factors, including perceptions of limited supply and high inflation. Prices then declined steady until the 2000s, when they began a slow uptick, nearly reaching the US$50 level again in 2011. Another steady decline followed until mid-2020, when fears over surging inflation (on the back of pandemic stimulus) and renewed economic output (as economies opened) once again drove prices up.

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Securities Disclosure: I, Pallavi Rao, hold no direct investment interest in any company mentioned in this article.