Investing in Silver

When investors become weary of the stock market because of economic conditions, they often look to precious metals as a form of safety. The first thing that comes to mind for most is gold. However, there is a strong argument to be made for investing in silver as well. In fact, there are some experts who believe that the price of silver will outpace the price of gold in future months and years. On the other hand, others believe silver is overpriced right now. So how do you make a decision about investing in silver? Good information is the key to any investment and silver is no exception.

Investing in silver, much like investing in any commodity involves a certain amount of risk. It is somewhat ironic that metals such as silver and gold are often touted as being safe-havens for investors when the fact is that they carry risk just like any other investment. During very turbulent times in the stock markets, however, these precious metals have usually done quite well, as more and more investors pull their capital from equities and invest in metal.

Reasons to Buy Silver

There are a couple reasons people prefer to invest in metals during times of volatility. For one, people know that silver is a real product. You can pick it up and it has had value just about as long as written history goes back. Some people postulate that if the worst case scenario happened and the world’s economies collapsed, metals like silver would probably be traded as money for needed items, the same as they once were. These investors tend to purchase physical silver items such as bars and coins.

Other investors trade in the silver market simply for the value of the commodity and will never actually hold an ounce of the silver that they control. They are speculators as well as long term investors who either see silver as an opportunity to make money or as a hedge against inflation and other economic issues. Whatever the reason for investing in silver, there are a number of different ways to do so.

Investing in Silver Coins and Silver Bars

Up until 1965, there were a number of silver coins minted in the United States for circulation. Dimes, quarters and fifty-cent pieces were minted in 90% silver. Many of these coins are no longer in general circulation but occasionally they still show up. These are often called junk silver because the value of the coin itself is worth only face value, but the value of the silver it contains is worth much more. In other words, junk coins are not collectable except that they contain silver. These coins are not pure silver bullion, but contained other metals such as copper.

After production for general circulation ended, many countries issued silver bullion coins, specifically for investing. Most of these coins are 99.9% pure silver and are often bought and sold by silver investors around the world. Many of the coins issued by countries are technically legal tender, but are not really meant for circulation. Privately labelled silver coins are called silver rounds and are not legal tender.

Many silver investors choose to buy silver bars rather than coins. There really is no best choice; it is more a matter of preference. However, price should play a role in the decision if the intent is purely from an investment perspective. Silver bars tend to be priced a bit lower than coins, perhaps because many people like the coins and they cost a little more to manufacture.

Silver Bullion Pricing

Prices for silver coins and silver bars are based on the spot price, which is the current market price of silver. The spot price changes throughout the day, so the price of silver coins or bars also changes throughout the day. When purchasing silver for investment, the goal is to get as close to spot price as possible. The larger the quantity purchased, the closer you will get to the spot price, generally speaking. You can measure the percentage over the spot price by taking the sales price minus the spot price and dividing that answer by the sales price.

Let’s look at an example. Say the spot price of silver is £22 per ounce and you can buy a 1 ounce silver bar for £24. We can figure out the percentage mark-up by doing the simple math. (£24 – £22) / £24 = .08 or 8% markup. Ideally, we would like to get the mark-up down a little, at least nearer to 5%. In this case we may need to purchase a larger quantity or a larger bar to get a better price. With 8% mark-up, the price of silver will need to rise 8% for us to break even on this investment. Not a bad scenario, but we can definitely do better by waiting to invest a larger amount at once.

Other Silver Investments

Some investors may decide that they are not interested in silver coins or bars. Perhaps they do not want to deal with storing it, the risk of losing it or even theft. There are still a lot of options for investing in silver.

Silver exchange traded funds (ETFs) offer the opportunity to invest in silver without ever having to touch a troy ounce. You can even invest in silver bullion through funds such as the iShares Silver Trust (symbol: SLV), which holds over 9000 metric tonnes of silver. Each share is worth 1oz of silver bullion, without investors ever having to actually handle the commodity.

Mutual funds are another great choice and offer a bit more diversity than just silver bullion. For instance, the Vanguard Precious Metals and Mining Investment fund (symbol: VGMPX) invests in the stocks of companies from around the world that are engaged in mining, processing, or distributing (among other things) precious metals including platinum, gold and silver. The price of these funds does not rely solely on the spot price of silver, although the price of silver will have a great effect on the value of VGMPX shares and other funds like it.

Risks of Investing in Silver

There are a number of risks involved in investing in silver, depending on the type of investment you choose to make. As mentioned, if you are purchasing silver coins or bars, there is the risk of actually losing your collection or having it stolen.

Virtual ownership of silver through other means such as ETFs carries unique risks as well. There are some people who believe that trusts such as the iShares Silver Trust are not overseen closely enough and that they may not in fact hold enough silver to cover all of the shares that they have sold. If this turned out to be true, it could be devastating to shareholders and to the silver market, especially in the short term.

Longer term, the value of silver, just like the value of many investments, is somewhat subjective and open for debate. Some analysts believe that the price of silver has been increasing in recent years simply out of fear of the stock market or even driven up by speculators and also as a result of financial news stories touting its safety and returns in recent years. Those analysts fear that there may be a silver bubble looming, ready to burst, sending silver prices down very rapidly.

On the other hand, other analysts look at the historical price of silver and argue that it is still undervalued. Gold is often seen as the standard for precious metals investments and the price of silver has been compared to gold for many years in terms of a ratio. Originally, the ratio for the value of gold to the value of silver was 15.5 to 1. That meant that 1 troy ounce of gold was worth 15.5 times more than 1 troy ounce of silver. Over time, this ratio has changed and currently the ratio is between 40 and 45 to 1. This would mean that for the ratio to get back to around 15.5 to 1, the price of silver would need to more than double (nearly triple) if the price of gold remained the same.

As you can see, investing in silver is not without risk. However, there are some aspects of silver, similar to most commodities that can be said for certain. Silver is a physical object. It can be held in your hand and has had value for thousands of years. Whether you believe silver is undervalued or even overvalued today, it is easy to see why so many people advocate owning silver as part of a diversified investment portfolio.