'Should I invest in silver?'

By Walter Updegrave, senior editor


(Money Magazine) -- Is investing in silver a smart thing to do now? -- Mary, Holland, Michigan

Hi ho, Silver! Away! With the price of silver galloping along in recent months, the Lone Ranger with his silver bullets would be one rich dude today.

walter_updegrave__2009b.03.jpg

And that's despite a big slide in the price of silver in the past few days. Since August of last year when sterling really began to take off, the value of the iShares Silver Trust ETF has soared some 125%, with much of that increase coming in the past three months.

The iShares Gold Trust ETF, by contrast, has gained "just" 30% since last August.

What's been driving this frenetic rise? Precious metals traditionally do well in times of great turmoil. And there's no shortage of that today: witness the ongoing political upheaval in Libya, Syria and elsewhere around the Middle East.

And even though there's no clear evidence that inflation is ready to spike, the seeming inability of the federal government to get control of spending and deal with looming budget deficits creates a demand on the part of some investors for traditional inflation hedges like gold and silver.

That said, I also think a lot of silver's recent gains are the result of a self-reinforcing feedback loop. Silver prices climb, the rise gets talked up in the financial press, which attracts more investors, which pushes up the price yet more and starts the process all over.

Some people might call this a bubble in the making. So given all this, should you consider investing in sterling?

The trouble with estimating the future potential of silver and other precious metals is that there's no fundamental gauge for determining value. Precious metals generate no earnings. The value of silver as an investment is pretty much what someone's willing to pay you for it.

That's true for a stock too, except that, with stocks you can look at the profit potential of a company and then decide whether the stock price you're paying is realistic based on potential future cash flows.

It's possible that silver's ascent could continue if investors remain spooked about the future value of the dollar, inflation and political instability.

The death of Osama bin Laden at the hands of the U.S. military throws another wild card into the mix. Does it alleviate geopolitical risk, thus dampening demand for silver? Or create more fear over Al Qaeda's next move?

Truth is, no one really knows whether silver is going to continue its stunning rise, and whether the recent 10%-plus selloff will keep going.

But any reasonable person should be wary about any investment that's up so much.

History shows that bad things can happen after such meteoric rises. Think dot-com stocks and Internet mutual funds in 2000 and house prices after hitting their peak in 2006.

And even silver has gone through these boom and busts. After doubling in price from $9 an ounce in early 2006 to nearly $21 in March 2008, silver fell back to just over $9 in October, 2008, a decline of 57% over the course of seven months.

Again, I don't know what comes next, but it's important to understand that the potential for a drop is there. To me, all this says that getting on board now is a risky proposition at best.

Even famed former hedge fund manager-commodity investor-motorcyclist Jim Rogers, who's owned silver for years, says he's not buying at current prices (although he's not predicting silver's downfall either).

Of course, if someone is truly convinced we're in a silver bubble and that a collapse is imminent, there's always the option of selling short -- that is, borrowing silver and selling it in hopes of making a profit by replacing the borrowed silver later at a cheaper price.

You could do that by shorting a silver ETF like the iShares Silver Trust or by buying ProShares UltraShort Silver ETF, which aims to deliver twice the opposite, or inverse, performance of silver on a daily basis.

But to my mind shorting is even more risky. With conventional shorting, the possibility of having to put up more money if silver climbs rather than falls heightens the potential for loss.

And the methodology short (and short leveraged) ETFs like ProShares UltraShort Silver use to calculate their gains can be so confusing that investors may not end up with the gains they expected even if they make the right market call.

If you're considering silver because it's the talk of the investing world, I'd urge you to think about whether you're really making an informed investment or just following the herd.

I suppose you could rationalize buying silver today as a way to diversify your portfolio and hedge against inflation. But, frankly, if that's your real goal, you can accomplish it more easily and effectively by adding some TIPS, REITS or a natural resources fund, all of which you can find on our MONEY 70 list of recommended funds.

Bottom line: I just can't get very excited about silver. If that means missing out on an investment that goes on to rack up even more spectacular returns, that's no biggie to me.

The key to successful investing is to build a diversified portfolio that can perform decently over time in a variety of market conditions, not try to guess whether a niche investment that's all the rage will continue to sizzle or fizzle. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.98%4.08%
15 yr fixed3.09%3.11%
5/1 ARM3.20%3.22%
30 yr refi4.06%4.16%
15 yr refi3.17%3.20%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,810.06 91.06 0.51%
Nasdaq 4,712.97 11.10 0.24%
S&P 500 2,063.50 10.75 0.52%
Treasuries 2.32 -0.02 -0.86%
Data as of 11:04pm ET
Company Price Change % Change
Bank of America Corp... 17.12 0.12 0.71%
Kinder Morgan Inc 39.75 -0.17 -0.43%
Apple Inc 116.47 0.16 0.14%
Intel Corp 35.59 -0.36 -1.00%
Microsoft Corp 47.98 -0.72 -1.48%
Data as of Nov 21

Sections

This arrangement, announced Friday, illustrates how the lines have blurred between traditional TV networks and newfangled options like Netflix. More

The Obama administration is touting that its immigration action will boost wages. But the hike amounts to only $170 a year by 2024. More

Obama doesn't have the authority to create a startup visa, but part of his reform announcement could include a workaround for entrepreneurs: 'parole status.' More

Nearly half of all Americans say there's a chance they'll have to work during a holiday between Thanksgiving and New Year's, according to a new poll. And one in four say they'll have to work whether they want to or not. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.