Silver: Is it a Commodity or a Currency?

- December 24, 2014 -

When most of us think of precious metals gold tends to be our first thought. Silver, the less expensive of the two, tends to be relegated to second place. Silver is often thought of as similar to gold in that it’s pretty in jewelry and has always had value, but it’s fundamentally of no use to society. You could make that argument about gold which is why investors should look at gold as more of a currency than a commodity. Silver, contrary to gold, does have significant industrial and practical applications. Approximately half of all the silver produced globally is used by industry, the balance being used as jewelry or for bullion.

Whether you believe silver is a good long term investment or not may depend on if you consider silver a commodity or a currency. If you feel the global economy is improving, then silver’s industrial uses make it a logical investment from a commodity perspective. However, if you view silver like gold, as a safe haven in tough economic times, silver would likely fare poorly in a world economic slowdown. So, is silver a commodity or a currency? I believe it is both.

First let’s examine Silver from the commodity perspective. Historically industrial demand for silver came from the photographic industry, a sector where demand has clearly dropped off significantly. However this drop-off in demand from one industry has been offset by demand in many new technologies and products. Most notable of these new products are photovoltaic cells used in solar energy production and in smart phones and tablets as well. Production in both of these fields, particularly in consumer electronics, is sensitive to global growth. Recent lower prices for silver and other commodities can be partially attributed to concerns for slower world economic growth. Still, slower growth is still growth and demand should ultimately increase.

A case for silver as a currency can be made as well. Central banks, notably in Japan, the US and the European Union, traditionally respond to sluggish economies by pursuing expansionist, easy money policies. This has the eventual effect of devaluing currencies and potentially encouraging inflation. With ongoing economic problems in many parts of the world, gold and silver, when viewed as currencies, may be the best tangible method of storing value.

Whether you view silver as a currency or a commodity, a solid case can be made for buying it at current levels. It represents an opportunity for a risk controlled trade to those who view it as a commodity, or a hedge against inflation or currency debasement if that is your concern.