Investing in silver
Silver is one of the so-called precious metals. Silver is a white metallic element, which has broad applications for technological or industrial uses, as jewellery and for investment purposes.
The high electrical and thermal conductivity of silver make it well suited for electrical applications. Silver compounds play an important role in photographic film production.
According to GFMS Thomson Reuters in 2011, approximately 56% of demand for silver came from industrial and photography applications. 20% of demand for silver stemmed from jewellery and silverware. Investment in silver accounted for 26% of demand.
Silver as an investment
Similar to gold, silver has a long history as a monetary asset and store of value. Silver coins were coined in many cultures and used as money. For example, the British Pound Sterling currency was based on silver. Before the 19th century, many countries had a gold or silver standard. Due to the discovery of large silver reserves in the 19th century, most countries switched to the gold standard, but silver remained an investment object.
Over the last decade, demand for silver investments grew significantly. According to GFMS, net investments in silver amounted to US$ 6 billion in 2010, which was about 10 times as much as the average annual investment amount from 2001-2008.
Investments in gold in terms of US$ are about 10 times higher than investments in silver. But while in the 90’s there was a net disinvestment in silver, from around 2000 on, the net investments in silver were positive and have increased significantly over the last decade.
Rationales for investing in silver or silver as an insurance
For investors, silver investments lie somewhere between gold and platinum or palladium investments. Many investors consider silver as a store of value and therefore a safe haven investment or a form of insurance in turbulent times such as the current financial crisis. On the other hand, silver is characterized by a much larger industrial demand than gold and resembles other precious metals, namely platinum and palladium, in this regard.
These characteristics imply that in times of economic or geopolitical uncertainty, investment demand for silver as a store of value can grow significantly, while industrial demand tends to decrease. Conversely, in times of strong economic growth and low economic risks, investment demand is lower, but industrial demand is higher. However, in high growth periods of the economy, inflation rates are often elevated. Therefore, even in such periods, silver often attracts investment demand from investors, who want to protect their wealth against inflation. Recent examples of such behaviour can be found in China.
Jewellery demand accounts for a significant share of total demand for silver. In difficult economic times, demand for jewellery generally decreases. This is especially true for gold, which is very expensive. Silver jewellery, on the other hand, can even profit from a depressing economic outlook, since demand could shift from expensive gold or platinum jewellery to cheaper silver jewellery. Unlike gold and platinum, the price of silver and its status as an insurance asset could therefore even be supported by an increased jewellery demand in times of economic stress.
Comparison of different silver investments
Generally speaking, there are three different forms of investing in silver: Silver bullion, silver backed securities and silver mining stocks or mutual funds investing in silver mining companies. Securities backed by silver can be, e.g., silver mutual funds, Exchange Traded Funds invested in silver (Silver ETFs) or Silver Exchange Traded Commodities (Silver ETCs).
While physical silver in the form of silver bullion bars or silver bullion coins provides direct exposure to silver and outright ownership of silver, the other forms of investing in silver are more indirect.
Silver ETFs or mutual funds investing in silver are fund structures, i.e. investors gain ownership of shares in the respective funds and ultimately own physical silver bullion. In the case of Silver ETCs, investors acquire only a claim against the issuer, typically a bank or an asset management company, but no ownership title. Therefore shareholders of Silver ETCs bear a counterparty risk. Some commodity ETCs are not even backed by any physical commodities.
Stocks of silver mining companies or mutual funds / exchange traded funds investing in mining companies provide much less exposure to silver. Mining companies regularly produce different precious metals, not just silver. In addition, the stock price of a mining company is only partially influenced by the price of silver. Other factors like management quality, reserves etc. can play a much larger role.
Physical silver, i.e. purchasing silver bullion provides investors with the most direct ownership of silver. Investors acquire outright ownership of silver, have no counterparty risk and are not depending on the management qualities of a mining company. A direct investment in physical silver is therefore the first choice for investors who want a 1:1 exposure to the silver price and/or the safety associated with outright ownership of physical silver. Whereas an issuer of e.g. a Silver ETC or a silver mining company could go out of business, physical silver will always have some value.
Investing in physical silver
Investors, who decide to purchase physical silver bullion face several issues:
- Buying, selling and storing silver cost-efficiently
- Safe storage of silver
- Minimizing efforts for handling the silver (buy, sell, transport)
Regarding the cost-efficient buying and selling of silver, the general rule is that the larger the silver bullion the smaller the margins upon purchase or discounts when selling the silver bullion. A large bar of silver is typically traded at a much lower margin than a smaller bar or a silver bullion coin.
With regards to the safe storage of silver, professionally vaulted silver is, for many private investors, the best choice. The price for one ounce or gram of silver is significantly lower than the price for an equivalent amount of gold, which is the reason why gold is sometimes called the “more expensive cousin” of silver. The current ratio of silver to gold prices is around 1:50. This implies that an investor receives about 50 times more silver than gold in terms of mass for the same amount invested.
There are good safes available for private use, but they are costly and still carry the risk of armed robbery. Also, the transport in and out of a private safe can be time-consuming and costly. The latter argument is also valid for safe deposit boxes, e.g. safe deposit boxes operated by banks. But safe deposit boxes are often limited in terms of space, and storing silver bullion will be expensive.
Vaulted silver, i.e. the storage of silver bullion in a professional, high-security vault operated by a specialized security firm or bank, can be the better alternative to privately storing silver for private investors. Investors, who purchase vaulted silver, have direct ownership of their silver holdings and can request delivery of their silver. The purchase and sale of the silver is managed through the provider, so there are no handling efforts by the investor, and due to the large trading volumes, the margins on the purchase and sale of vaulted silver are regularly significantly lower than the margins for privately purchased silver bullion.
A range of providers offer vaulted silver for private or institutional investors worldwide. Some of the providers offer storage options in different countries, enabling investors to geographically diversify their silver holdings.
Please see our provider overview for more details.
Taxation of silver investments
Under most jurisdictions, silver falls under a Value Added Tax (VAT) or sales tax unlike gold, which is exempt from VAT, for example in the European Union if it meets several criteria in order to qualify as investment gold.
The tax rates can vary by country and product type. In Germany for example, silver bullion bars are taxed at a higher rate than silver bullion coins.
Investors who want to hold physical silver can avoid paying VAT by purchasing Vaulted Silver, which is stored offshore. As long as the investor does not get the silver delivered to him, VAT does not apply.
In terms of capital gains tax, silver investments are often treated in the same way as gold investments. The taxation depends on the individual’s specific tax rate, country of residence and realized gains.
Outlook for silver investments
Investments in silver are not seen as much as insurance assets against economic or geopolitical crises as investments in gold. Although silver can also play the role of a safe haven in such situations, the price of silver can also profit in less turbulent times, e.g. when the economy is growing and industrial demand as well as jewellery demand for silver are increasing.
ScotiaMocatta, which is a division of the Canadian ScotiaBank and a leading, global precious metals trader, stated near the end of 2011 that it will remain bullish in 2012 for silver as well as for gold. Scotia Mocatta expects that a period of deflation in Western economies is likely and that this will support the character of gold and silver as a store of value or insurance.
If the economic development remains depressed, silver jewellery will likely continue to gain market share from other precious metals like gold or platinum, which would also support the price of silver.
We believe that both gold as well as silver can play an important role in a well-balanced investment portfolio for private investors. Since the price of silver is more volatile than the gold price, silver investments should normally be relatively smaller – at least with regard to safety oriented investors. However, speculative investors could consider silver as a more leveraged alternative to gold and could therefore allocate higher shares of their investment portfolio to silver.
For investors considering buying a precious metal like silver, choosing the right form of investment is key – both in terms of safety but also in terms of costs. In general, silver bars have lower premiums than silver coins, and the larger the bar the lower the relative price premium. Vaulted silver can therefore be an attractive way of investing in silver, since many providers of vaulted silver offer buying large bars or fractions of large bars.