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As someone interested in precious metals, you’ve probably heard that one of the top reasons to invest in silver is that it works as a hedge against inflation. Investors are constantly battling volatility, market downturns, and inflation as they try to grow their wealth.
Silver bullion is a powerful and accessible asset for investors trying to protect their purchasing power, not just the dollar value of their savings.
The world is going through a period of intense inflation right now. In Canada, inflation rates have only recently slowed down to 3%, a rate that still remains above the Bank of Canada’s targeted 2% but significantly lower than the 40-year high of 6.8% experienced in 2022.
The post-pandemic acceleration of inflation was a new experience for many Canadians. The country recently experienced a decades-long period of low inflation and ultra-low interest rates meant to prop up economic growth.
Many households were not prepared for the impacts of high inflation on their budgets. Higher inflation created a much higher cost of living, with the prices of groceries, gas, vehicles, shelter, and all kinds of consumer goods rising much faster than wages.
Understanding inflation is the first step in preparing yourself for it. Inflation is often blamed for the rising price of groceries, rent, or gas, but that’s not entirely right. More accurately, inflation is a measurement of the increase in the price of consumer goods. Inflation is the slow loss of the purchasing power of currency, which is reflected in the overall increase in the cost of goods and services over time. Inflation doesn’t cause the increase; it is the increase.
In Canada, the inflation rate is calculated by Statistics Canada, which tracks the price of a basket of goods. The basket of goods is a long list of essentials and consumer goods, also known as the Consumer Price Index (CPI). The 8 major components of the CPI are:
How you experience inflation is very personal. For example, if you have paid off the mortgage on your house, you will have very different price pressures than someone renting an apartment or someone who had to renew their mortgage at a higher interest rate.
The increase in the cost of the CPI gives us an average increase across the country, which can help investors when they’re calculating their real returns.
You’ve worked hard, saved your money, and put it away in a variety of investment vehicles. For many investors, this is likely a mix of stocks (often via mutual funds or ETFs), bonds, and cash savings accounts. The returns on these savings may vary. A savings account may only generate 1.5 to 4% interest, while a mutual fund can have much more volatile returns. In good years, your investments could grow 10 to 20%, while in down years, you might actually lose a significant sum of money.
Inflation eats into all of it. Investors don’t just look at their annual returns or average returns; they also have to look at their actual rate of return. This is your return minus the rate of inflation and taxation. Because inflation represents the loss of purchasing power of currency over time, you also have to consider how much less your money is worth, even while it grows.
For example, let’s say you have a savings account that gives you a 1.5% annual interest rate just to keep your cash in the account. At face value, it seems like a zero-risk way to make a bit of extra income on top of your savings. However, when inflation is 3%, your actual rate of return is -1.5%. The balance in your account may be rising, but your savings are decreasing in value because the money will buy you fewer goods and services tomorrow than it would today.
There are two ways to combat inflation and protect the purchasing power of your savings: invest in assets that appreciate at a higher rate than inflation (such as stocks) or invest in assets that have historically preserved their value while currency has become devalued. The latter type of asset is known as a hedge, and a good hedge against inflation comes with considerably lower risks than stocks.
Assets that have historically acted as inflation hedges include:
Assets that produce a fixed income or a high-yield savings account can also hedge against inflation, but only if they produce at a yield higher than inflation. When inflation starts to reach 4% and higher, these assets struggle to keep up, while real estate, commodities, and bullion tend to perform better.
So, why does silver perform as an effective inflation hedge? Gold and silver buyers are drawn to precious metals because of the role gold and silver used to play in the global financial system. For thousands of years, gold and silver were used as the primary means of exchange. To many people, gold and silver remain real money, while fiat currency (currency not backed by gold or silver) remains an ongoing social experiment.
The silver standard only ended completely in 1935, with the gold standard following suit in 1971. While there have been countries that went off those standards in the past, those periods almost always ended in hyperinflation and economic collapse. Gold and silver give people faith in the value of a currency. Even without those standards, they see silver as a store of value that does not diminish with inflation.
Many people have silver jewellery or sterling silver in their homes, and they can earn a bit of money from selling them. However, if you’re looking to buy silver as a way to invest, you should be looking for a different set of products than jewellery and flatware. Silver jewellery, flatware, and tea services are often melted down and recycled after they’re sold.
Silver bars and coins are 99.9% silver products. When you purchase bars and coins, you avoid paying for factors like design and brand name that affect the cost of flatware and jewellery. You’re primarily paying for the metal itself, as well as a premium that bullion dealers and mints charge to cover their own costs.
Silver bars and coins are stackable, space-efficient, and easy to store in a home safe. You can buy silver bullion directly from a bullion dealer. When you want to cash in your investment, bullion dealers make the process quick and simple, meaning you don’t have to worry about liquidity.
Even once you’ve restricted your search to bars and coins, there are still plenty of options. There are a number of manufacturers of silver bars, such as the Royal Canadian Mint, the Royal Mint in the UK, Valcambi, PAMP Suisse, and many others. They can also be purchased new or preowned – usually by other investors who decided it was time to liquidate.
When it comes to silver coins, there are even more options. The right coin for you depends on your goals and interests. If your top priority is including an inflation hedge in your portfolio, look for a 99.9% or 99.99% pure silver coin at the lowest available price. In Canada, this usually means a 1 oz Silver Canadian Maple Leaf, although 1 oz Silver Britannia coins from the United Kingdom and 1 oz Silver Eagles from the United States also tend to be readily available. There are many other countries that produce their own silver coins, such as the Austrian Silver Philharmonic and the Chinese Silver Panda.
Don’t worry too much about where a coin comes from as long as it’s one of the more recognizable ones. The value of international silver coins depends entirely on the value of silver as a metal. There are collectible coins, but these tend to be rarer, as there are fewer of them out in the world, and they have to be in relatively good condition to have extra value.
The important thing to remember is that for most silver products, the most important factor in its value is usually the purity and weight. When you’re investing in silver, you may want to focus on getting the best value for the product, which means more silver at the lowest available prices.
In order for silver to act as an inflation hedge, it does need to appreciate in value. Silver doesn’t generate interest or dividends, so all of its ability to exceed inflation comes from price increases. These are some of the leading factors that affect the value of precious metals, including silver.
Whereas gold tends to be highly impacted by investor sentiment and fear, silver prices can also rise during times of economic growth.
Protect your savings from the effects of inflation. With silver, you can combat the long-term loss of purchasing power. Silver bullion is an effective inflation hedge that has been used to preserve wealth for thousands of years.
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