The Barefoot Investor, Scott Pape, has issued a stark warning to investors caught up in the current frenzy surrounding silver, arguing that the precious metal has a historically poor track record for building sustainable long-term wealth when compared to traditional share investments.
Silver's Spectacular Surge and Historical Context
Silver has captured significant investor attention recently, with prices soaring more than 50 per cent in the past month alone and achieving gains of approximately 145 per cent over the last year. This remarkable performance is largely attributed to persistent global inflation concerns and rising industrial demand for the metal.
Illustrating the long-term perspective, Mr Pape referenced a reader's inquiry about their grandfather's investment in two one-kilogram silver bars purchased back in 1987 for $701. Those same bars are now valued at around $10,200.
'Gramps' silver bars have gone from $701 to around $10,200 over 39 years,' Mr Pape noted. 'That's a compound return of about 7.1 per cent a year. That's better than a slap on the rod with a Murray cod - as my grandfather would say.'
The Critical Comparison with Share Market Returns
Despite this seemingly healthy return, Mr Pape was quick to highlight the significant drawbacks of silver investment. He pointed out that capital gains tax would apply to any profit, and silver dealers typically charge substantial buy-sell spreads, eroding investor margins.
More crucially, he presented a compelling alternative scenario. A $701 investment placed into an Australian shares index fund in 1987, with dividends consistently reinvested, would be worth approximately $20,200 today.
'Double the value,' he emphasised. 'Plus, unlike the metal bars, you'd be getting a tax-paid dividend of around $800 a year which you could spend, or reinvest to compound your money.'
Understanding Silver's Dual Role and Inherent Volatility
Over the past twelve months, silver has outperformed many other commodities, even rising at a faster rate than gold. Unlike gold, which is primarily held as a value store, silver serves a dual purpose as both an investment asset and a vital industrial component.
Its excellent conductive properties make it indispensable in manufacturing, featuring in everything from microwaves and solar panels to children's toys. However, this strong performance underscores one of silver's principal risks: extreme price volatility.
Gains frequently occur in short, explosive bursts, often followed by extended periods of stagnation or severe price corrections, making market timing exceptionally challenging for investors.
Practical Costs and Broader Market Influences
Investing in physical silver also introduces practical complications and costs not associated with listed securities. These include storage fees, insurance premiums, and liquidity issues, which can further diminish net returns.
AMP chief economist Shane Oliver analysed the recent market dynamics, noting that erratic US policy and heightened geopolitical risks initially propelled both gold and silver prices sharply higher. Gold even briefly surpassed $US5000 for the first time before retreating.
The subsequent pullback was triggered by former President Donald Trump's nomination of Kevin Warsh as Federal Reserve chair, which sparked market expectations of a less accommodative monetary policy stance.
'This looks like a bit of a correction though – albeit a very severe one for silver – as both gold and silver were very overbought and vulnerable to a sharp fall having risen so far so fast,' Mr Oliver observed.
Mr Pape's analysis serves as a timely reminder for investors to look beyond short-term hype and consider the historical evidence, tax implications, and alternative investment vehicles that may offer superior long-term wealth-building potential.
