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Silver’s Beta is Irrelevant

By: Dr. Jeffrey Lewis

-- Posted 13 December, 2011 | | Discuss This Article - Comments:

Beta is a financial term that describes an asset’s volatility relative to the S&P500 index.  In scoring individual assets against the equity markets, financiers hope to find a collection of securities that provide the best possible appreciation with the least amount of beta.  That is, financiers are compensated to make many different investments to form the perfect portfolio that, over time, goes up in the straightest line possible.


There are obviously a few short-comings with any beta figure for any non-equity investment.  First, silver is a commodity, not a company, so the comparison here isn’t very applicable.  You wouldn’t compare the relative volatility of your automobile to the stock market, even if it makes up a large part of your net worth.  There just isn’t enough basis for comparison.


Even then, we can afford to give financiers the benefit of the doubt in applying a beta measurement to commodities on this particular point.


Why Beta Shouldn’t Concern Investors


Warren Buffett puts together one of the most persuasive arguments against using volatility as a measurement of risk.  In a famous quote, he notes that a particular stock would be riskier if it were priced at $40 than it was at $50 if one were to use a beta score.  That is, a drop to $40 would imply the company’s valuation is more volatile, and thus, a riskier investment. 


Buffett’s central point is that the only applicable risk measurement is that of total loss.  If total loss is the only potential negative outcome, then obviously investors would much prefer pay $40 than $50 for the same investment.  The risk to reward is far better.


His other point is equally important: what matters most with companies or commodities is not the price that the market assigns to a particular investment, but the real, intrinsic value of an investment.  Silver has intrinsic value because it is a commodity; it’s rare, and it exists regardless of the world around it.  In this regard, silver is a safer investment than the S&P500 because it has real intrinsic value.  An ounce of silver will exist regardless of the life of the S&P500 components.


Beta’s Minor Consideration


Beta serves one purpose exceptionally well.  This purpose is to score volatility of an investment for those investors who need to consider volatility in their overall plans.


Because silver is volatile, it makes a very poor investment for the short-term.  Sure, silver prices can spike quickly, but prices can fall just as fast.  What happens between today and tomorrow is hardly affected by the real intrinsic value of silver bullion.  More accurately, silver prices move based on a risk-on, risk-off trade, which is tied to beta scores.


Investment capital that is invested for the purposes of retaining and growing purchasing power for only a few years should not be invested in metals.  The metals markets are far too volatile, and the short-term market mechanics do not allow for accurate price discovery.


However, investors who have a long-term investment horizon are empowered between the discrepancy in perceived risk and real risk.  Perceived risk from silver is great; it is highly volatile.  However, over the long-term silver has shown its tendency to revert to the mean, making it an excellent, long-term value proposition for anyone concerned about the purchasing power of their savings.


Dr. Jeffrey Lewis

-- Posted 13 December, 2011 | | Discuss This Article - Comments:

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