Silver Investments Explained

Posted by admin on Saturday, July 30th, 2011

For thousands of years, silver has been viewed as a form of money and store of value. However, it lost its role as legal tender in the USA when the silver standard, which had been adopted by Acts of Congress in 1933, was finally abandoned in 1968.

Like most commodities, the silver price is driven by supply and demand and, to a lesser extent, investor speculation. Unlike gold, silver has a high usage in industry. This means it is also susceptible to the demands of manufacturers, and overall economic activity will affect the silver price accordingly.

Gold is seen as an ideal investment in times of economic uncertainty, and silver often tracks the gold price because of the store of value consideration. Being cheaper than gold, silver is sometimes referred to as the ‘poor man’s gold’. The ratio of the gold price to silver price varies greatly, and is often analysed by traders and investors as an indicator of the relative value of the metals against each other. In 1792, the gold/ silver ratio was fixed by law in the United States at 15:1, meaning that one troy ounce of gold would buy 15 troy ounces of silver. The average ratio during the 20th century had risen to 47:1. Simply put, the lower the ratio, the more expensive silver is compared to gold, and the higher the ratio, the cheaper the white metal is in comparison to gold. With gold trading at around $1600, and silver at $40, the current ratio is approximately 40:1.

Some respected market watchers expect this ratio to move down to 16:1 over the coming years, as investment money seeks the safe haven of precious metals and physical investments in the face of governmental debt and increased printing of money devaluing cash. If this is the case, investment in silver now will give a greater rate of return than investment in gold as this ratio narrows.

For those seeking to invest in silver, there are several ways to do so.

Investing Money In Silver Bars

Purchasing silver bars, or ingots, is a traditional way of investing in silver. Because they are flat, rectangular shaped, they are easily stored and can be bought in various sizes to suit the pockets of all investors.

A popular size amongst retail investors is 100 troy ounce bars. Weighing around 3.11kg they will trade at a premium to the spot silver price, though this premium is not as great as the premium of, say, silver coins that normally sell for well over the spot silver price.

Coins And Rounds

The most common way of investing in silver is by collecting coins. This is seen as a hobby by many, and, unlike silver bars, the value of a coin is dictated not only by the weight and silver content of the said coin, but also by its ‘collectability’. This collectability is subject to its rarity, and numismatic value. Many new issues of coins, such as the America the Beautiful issues from the US Mint, are minted in limited numbers, and this helps to preserve value now and in the future.

US silver coins minted before 1964 have a high silver content, though are considered as ‘junk silver’ because the silver content is ‘only’ around 90%. Similarly, sterling silver coins from the United Kingdom and Canada minted before 1919, and minted in Australia before 1945, are considered junk with silver content of 92.5%. In contrast, ‘fine silver’ coins minted today – for example the Canadian Silver Grizzlies – are 99.99% pure silver where as the standard minted government coins such as the Mexican Libertads are 99.9% pure.

The collectability and high silver content of fine silver coins mean that they are sold with a higher premium over spot silver prices than bars.

Where coins have a status as legal tender, silver rounds such as the Engelhard Prospector do not. Minted as either a bar or a coin, silver rounds are produced by a large number of mints, are generally in the shape of a coin and are .999 fine silver. They usually contain one troy ounce of silver.

Silver Certificates

Silver certificates allow an investor to hold the rights to a quantity of silver without having to store the actual silver bullion. They let investors buy and sell the security without the complications associated with delivery and receipt of the physical asset. The Perth Mint Certificate Program (PMCP) is the only government-guaranteed silver-certificate program in the world.

Exchange Traded Funds

An Exchange Traded Fund is an investment fund whose shares are traded on stock exchanges, very much like stocks. An ETF will hold stocks, commodities, or bonds, and trade close to its net asset value. They are attractive to investors because of the low dealing costs, and, for many, are tax efficient investments.

Silver ETF’s are a quick and easy way to gain exposure to the fluctuations of the silver price, and do not require the inconvenience of storing physical bars, coins, or rounds. However, for numismatists part of the attraction of buying coins is the pleasure of being able to view a beautiful piece, possibly of historic significance, that holding coins gives.

The largest silver ETF is the iShares Silver Trust, which holds approximately 340 million troy ounces of silver in storage. Investors can purchase ETF’s through a stockbroker.

Mining Companies

An indirect way of gaining exposure to silver is to invest in the shares of silver mining companies. Many mining companies rarely mine silver alone, as it is normally found alongside ore containing other metals. Shares, therefore, should not be viewed as solely an investment in the fortunes of silver, but also in the qualities of other base metals. Investors in mining shares should also note that there are many factors to take into consideration when investing, other than solely the spot silver price.

Investment And Taxation

Returns are not simply a matter of the difference between the purchase price and sale price of the investment made. A major consideration is the taxable position of the product in which the individual has made the investment. Taxes that may be applicable to any investment include VAT, income tax and capital gains taxes, and vary from country to country. Anyone buying silver for its investment value alone should always be mindful of any taxes that may be applicable.

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