In times of financial uncertainty in the stock markets, many investors are tempted to move their money into commodities such as gold and silver. For some investors, this strategy can help protect their portfolio from falling stock prices. At the same time, investing in silver comes with some inherent risks. Every investor should understand the dangers of a silver investment when deciding where to place his money.
Basics of Silver Investment
When someone places part of her holdings into silver, she is buying a futures contract -- an agreement for a delivery of silver at a later date. Some purchasers of commodities do actually settle their contract this way, especially if they are firms that have industrial uses for those commodities. But in most cases, contracts are speculative, meaning that the people who are buying them are primarily interested in the possible appreciation of an underlying commodity’s value.
Because silver investments are speculative for most investors, they come with a considerable degree of market risk. Commodities contracts do not accumulate earnings or pay dividends in the way that stocks would. They also can be subject to wild swings in value. Without underlying earnings potential or fundamentals, a commodity is subject only to the forces of supply and demand in the market. Major news events and changes in the supply of silver can have a considerable impact on its price. Speculation in some cases can lead to “bubbles.” These periods of rampant overvaluation can eventually collapse and result in major losses.
The Commodity Futures Trading Commission and commodity exchanges tightly regulate the terms for trading silver commodities. In most cases, this protects investors. But shifts in margin requirements and trading restrictions can sharply affect conditions in the market and result in potential price shifts. For example, a change in exchanges’ rules for margin trading -- trades executed with borrowed money -- was blamed for considerable price changes for silver contracts in 2011, according to The Wall Street Journal.
Although the silver market is carefully regulated, all commodities are subject to potential price manipulation and fraud. Regulators are not always able to identify and stop illegal activities before they affect the value of investors’ portfolios. To avoid these dangers, it’s important for investors to make sure they know as much as they can about their brokers and to make sure their silver investments are made on a regulated, well-established commodity exchange.
- Mount Lucas Management Corp.: The Mechanics of the Commodity Futures Markets; Robert Lerner; June 2000
- The New York Times: Response to Volatility in Silver Takes Hold; William Neuman and Graham Bowley; May 8, 2011
- The Wall Street Journal: Tripped Up by the Margin; Carolyn Cui; June 8, 2011
- The Wall Street Journal: Act Now, CFTC Is Urged; Susan Pulliam and Carolyn Cui; Oct 27, 2010
- USA Today: Is Loading Up on Silver a Good Investment Idea? Matt Krantz; Jan. 31, 2011
- Dummies.com: Understanding the Real Risks Behind Commodities; 2011
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