Why Are People Buying Silver? Top Reasons to Invest

Silver, a precious metal, has long held a unique position in global finance and industry. People buy silver for various reasons beyond its traditional role as a store of wealth. It serves both as an investment vehicle and a vital component in modern technology. Its dual nature contributes to its appeal among buyers seeking to protect or grow assets.

Inflation and Economic Hedging

Silver has historically served as a hedge against inflation and economic uncertainty. When inflation rises, the purchasing power of traditional currencies diminishes, and tangible assets like silver often retain their value. During economic crises, such as the 1970s and the 2008 financial crisis, silver prices saw significant increases. For example, silver delivered a 1,546% return during the 1970s stagflation era, when inflation averaged 7.4% annually.

The metal’s intrinsic value and limited supply make it distinct from fiat currencies, which can be printed at will. This characteristic allows silver to preserve purchasing power when currency values decline. Unlike bonds or cash deposits that lose purchasing power during inflation, silver’s tangible nature provides a safeguard against devaluation.

Silver’s price often rises in tandem with inflation, helping to offset losses that might occur in traditional savings or bonds. While it does not generate interest or dividends, its ability to act as an inflation hedge comes from price appreciation. Demand for precious metals tends to increase as inflation rates rise, further supporting silver’s value.

During the 2020-2021 period, silver delivered approximately 15% real returns after inflation adjustment. This makes it a reliable choice for investors seeking to protect their purchasing power.

Industrial and Technological Demand

A significant portion of silver’s annual demand comes from its extensive use in various industries and emerging technologies. Over half of the global silver consumption is attributed to industrial applications. Silver is a vital component in electronics due to its superior electrical conductivity, the highest among all elements. It is found in virtually every electronic device, from mobile phones and computers to circuit boards, switches, and electrical contacts.

The solar energy sector is a major consumer of silver, as the metal is crucial for producing photovoltaic (PV) panels. Silver paste in solar cells collects electrons and conducts the generated electricity, enhancing efficiency. In 2023, solar PV cells alone accounted for 193.5 million ounces of silver demand, projected to reach 232 million ounces in 2024, representing 16-19% of total silver demand. The demand for silver from solar panel manufacturers is forecast to increase significantly, potentially reaching one-fifth of total silver demand by 2030.

Silver’s applications also extend to the medical field, where its antimicrobial properties are highly valued. Silver nanoparticles are incorporated into medical devices like catheters, surgical instruments, and implants to reduce infection risks by preventing bacterial growth. Silver is also used in bandages and ointments to promote faster healing and combat antibiotic-resistant bacteria like MRSA.

The automotive industry, particularly electric vehicles (EVs), represents another growing source of demand for silver. An electric car uses a considerably higher amount of silver, ranging from 25 to 50 grams, primarily in its electrical systems, contacts, and battery management systems. This is a notable increase compared to traditional internal combustion engines, which use much less. The transition to electric vehicles is expected to drive a substantial increase in silver consumption over the next decade. Beyond these, silver is used in catalysts for producing chemicals, synthetic fibers, and even in water purification.

Portfolio Diversification Strategies

Including silver in an investment portfolio can contribute to diversification. Diversification involves spreading investments across different asset classes to manage risk. Silver’s value movements often differ from those of traditional assets like stocks and bonds. This characteristic, known as low correlation, can help reduce overall portfolio volatility.

Precious metals, including silver, generally exhibit low correlations to both equities and fixed income investments. This makes them effective diversifiers within traditional portfolios. Silver offers diversification benefits, even with a moderately weak positive correlation to stocks, bonds, and commodities. Its inclusion can help stabilize a portfolio during uncertain economic times.

Silver’s dual nature as both a precious metal and an industrial commodity offers unique diversification benefits. It can act as a stabilizer when markets experience downturns, potentially holding or gaining value. For example, a diversified portfolio might allocate between 5% and 20% to physical silver, depending on an investor’s risk tolerance. Adding silver to a portfolio can enhance risk-adjusted returns by providing a counterbalance to more volatile assets.

Market Dynamics and Accessibility

Silver’s market dynamics and accessibility contribute to its widespread appeal among investors. Its relatively lower price point compared to gold makes it more accessible to a wider range of individuals. Online platforms have further increased the ease of purchasing physical silver.

When acquiring physical silver, buyers typically pay a premium above the spot price. This premium covers manufacturing costs, dealer margins, and distribution expenses. Premiums can vary based on the product type, with silver bars generally having lower premiums (e.g., 2-15% over spot) compared to government-minted coins (e.g., 10-30% over spot), which may have higher collectible value. The premium percentage for silver is often higher than gold due to unit size and market liquidity.

Regarding taxation, the Internal Revenue Service (IRS) classifies physical precious metals, including silver, as “collectibles.” Profits from the sale of physical silver are subject to capital gains tax. If held for one year or less, gains are taxed at ordinary income rates. For holdings sold after more than one year, a long-term capital gains tax applies, capped at a maximum of 28%. This 28% rate can be more favorable than ordinary income tax rates for individuals in higher tax brackets.

Sales of physical precious metals must be reported on Schedule D of Form 1040 on an individual’s tax return. Dealers may also be required to submit Form 1099-B for certain sales. The cost basis for calculating capital gains includes the purchase price plus any associated costs like dealer premiums and storage fees, which can reduce the taxable gain. Taxes are only due when the silver is sold, not while it is held.