🥈Your Guide To Investing In Silver

Vaultcomms Newsletters
8 min readSep 15, 2020

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Silver lining around dark clouds
Just like how every dark cloud has a silver lining, there are silver linings to volatile markets.

Brief Background

There’s evidence to suggest that the first ever silver mine started in 3000 BC in Turkey and Greece. Eventually, silver became increasingly valuable as empires & dynasties adopted it as their currency. Nowadays, similar to gold, silver still has a role in the global economy, whether as a store of wealth, or its applications in industry and technology due to its unique properties.

What Can It Do For You

🛡️ Protection. Similar to gold, silver is often viewed by investors as a safe haven asset, a way of preserving wealth in times of instability, inflation and market volatility. It generally performs well when currencies lose their purchasing power. Silver tends to move in the opposite direction as stocks and bonds, it can help diversify your portfolio, lowering its volatility and reducing risk.

However… Silver can be more speculative than gold because it has a smaller liquid market (less people who want to buy/sell it) and that its price can be influenced by industrial/commercial demand since it accounts for 60% of total demand, unlike gold, which has a bigger liquid market driven by jewellery and investment demand. The main advantage that silver has over gold is that it’s more affordable, which means it’s easier to have a solid silver position in your portfolio than a gold one.

What Affects Silver Prices

There are several key factors that are involved in moving the price of silver:

  • ⛏️ Supply — Production & Scrap One of the reasons why silver is valuable is because supply is becoming more limited while demand is pretty stable. Mine production fell for the 4th year in a row in 2019, and might fall again this year because of higher mining costs. Also, recycling silver scrap metal also adds on to supply. Old-age photographic films used to use a lot of silver before the industry diminished, becoming a source of silver scrap, along with jewellery and silverware, which is then melted down and adds on to the the market supply. This can then put a cap on silver prices from going higher.
  • 🏭 Industrial Demand. Because industrial demand makes up 60% of total demand, it can have a big impact on its price. Silver is also used in the development of green energy through photovoltaics & Electric Vehicles (EVs), whether they’re hybrid or all-battery. Other types of demand include jewellery and silverware.
  • 🏦 Central Bank Policies. Monetary policies set by central banks such as setting interest rates and deciding whether or not to print more money, can also affect silver prices. If interest rates are high, it makes silver less attractive as other types of investments can provide higher returns due to the higher rates. In addition, printing more money could lead to inflation, which drives demand for silver.
  • 💵 The Value of the US Dollar. Because the US dollar is used as a benchmark for silver prices globally, they usually share an inverse relationship. If the dollar falls, other currencies are able to buy more silver, driving up demand and therefore increases silver prices, and vice versa.
  • 📈 Gold Prices. In general, historically, silver prices tend to follow the price of gold. The Gold/Silver Ratio is a popular analysis tool used by traders to determine if buying/selling silver is cheap/expensive compared to the gold price. It’s calculated as the price of gold divided by the price of silver (e.g. if gold costs $50 per gram and silver costs $0.50 per gram, then the ratio is calculated as 50/0.50 = 100). The higher the ratio, the more likely it is that silver may be underperforming.

Where Is Demand Coming From?

There are three main areas that drive demand:

  • 💎 Jewellery. Because it’s shiny and less expensive than gold, silver is also a popular metal of choice for jewellery. South & East Asian demand (particularly India) fuels much of this industry’s growth.
  • 🏭 Industry & Technology. Silver’s unique properties (the highest thermal and electrical conductivity, antimicrobial, malleability, etc.) means it’s used in many tech and manufacturing industries, such as renewable energy (especially in photovoltaic cells in solar panels), automotive, medicine, electronics, etc. Industrial demand makes up ~60% of total demand, and is expected to increase as silver will also play a role in the development of new technologies in the future, such as 5G and clean energy.
  • 💸 Private Investments. These include physical silver bullion bars, coins, and ETFs, funds and other similar products that invest in silver. Investors, both individuals and funds, see silver as a way to preserve wealth and minimise losses during market volatility and inflation.

A recent report from the Silver Institute forecasted the impact of coronavirus on the silver market: 4.6% decline in mine production, 7% decline in industrial demand, 7% decline in jewellery demand, and a 16% rise in physical silver bar and coin investments due to investors’ response to market uncertainty.

The Case Against Silver

Like gold, silver is not a productive asset, which means it doesn’t generate dividend payments and pays no interest, unlike stocks and bonds. Furthermore, silver price fluctuations are more volatile than gold because it has a smaller market with lower liquidity (less people trading), and since the value of silver relies on industrial & investment demand, any fluctuations in demand will be reflected in its price.

The Case For Silver

Although silver doesn’t provide dividends, silver can offer higher returns than gold since it’s much more affordable, which means if the price were to go up, you’d be able to receive a higher return. Furthermore, silver is still considered as a safe haven asset. Unlike gold, because of silver’s unique properties, the metal has many industrial applications, and will play continue to play a part in the development of future technology . Perhaps these reasons may be why Mr. Buffet amassed a chest of ~130 million ounces of silver back then, despite his negative stance on gold.

Popular Ways To Invest In Silver — Pros/Cons of Each

There are many ways in which you can buy/invest in silver. If you are still confused unsure about how any of these work, refer back to our basics newsletter for more information. Here are some of the more popular methods:

  • Physical Silver (Bullion Bars & Coins). The traditional way to buy silver. You can buy and directly hold physical silver bullion bars and/or coins. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw silver into finished bars and coins tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices. Alternatively, there are government-owned mints (if not available, reputable online precious metals dealers) where you can physically and/or digitally buy physical silver, with the option to store at their vaults for a fee.
  • Silver ETFs. Silver-backed Exchange-Traded Funds are very popular for many since you don’t have to bother dealing with physical silver, and yet, still have exposure to real silver market prices. They’re traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical silver. You also probably won’t be able to take delivery of your silver. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
  • Silver Stocks. These are shares of silver mining companies. There are no fees, apart from trading commissions depending on your broker. They don’t necessarily follow the price of silver since company profits and stock market movements need to be taken into account. Additionally, many of the silver mining companies produce and mine a range of other metals, with silver actually being a byproduct. In fact, the majority of silver is mined as a byproduct. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
  • Silver Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell silver at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in silver can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.

TL;DR — Is It The Right Investment For You?

Similar to gold, silver can be an effective way to protect against inflation (when currencies fall in value) and diversification to reduce overall portfolio risk. Unlike gold, silver is much more affordable & can be more speculative because its price is driven heavily by industrial/commercial demand. This means that you may get higher returns on silver.

🛡️ If you are considering adding silver for protection/preservation purposes, you may want to consider doing dollar-cost averaging (regular investments over time) to build your silver position so you can take advantage of the the times when prices are low.

💰 If you are considering adding silver for speculation and profit, you may want to monitor the factors that affect silver prices mentioned above, especially production levels and industrial demand. The Silver Institute provides insight into “bigger picture” data of supply and demand trends. You may also want to consider monitoring the gold/silver ratio, a popular analysis tool used to compare the prices of both metals. Basically, if gold costs $50 per gram and silver costs $0.50 per gram, then the ratio is calculated as 50/0.50 = 100. Generally, the prices of gold and silver move in tandem with one another. During financial crises, like the one we’re in right now 👀, gold tends to outperform silver, causing the gold/silver ratio to increase. However, when there is strong demand for silver or silver supply shortages, the ratio can decrease (which means that the price of silver might increase).

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.

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