How do you invest in Silver?


Why is Gold and Silver Valuable?

Humanity has had an affinity with precious metals since almost the beginning of time. Gold and silver has been sought after because of their properties. They are noble metals and the least reactive among all of them. They resist corrosion and oxidation.

You can make a gold scepter and 500 years later have scepter unchanged. Gold and Silver’s non-reactive nature makes it a perfect currency. Makes it good for longevity. This is why these metals are precious, because of their properties. Silver has always been second to Gold in terms of value because of Gold’s color. Since the ancient period it has been connected with wealth and luxury.

gold trading

Silver is widely used in many industries. Silver is used in mirrors, batteries, and electrical parts and in circuits. Silver is extremely malleable. It can be ground into powder, it can become a paste and the shape and form can also be modified. Silver is used in switches that you use everyday. Silver is also in use when soldering. Silver can have high tensile strength and ductility.

So, Silver as a metal is extremely useful and it has many properties. But as an investor how would you profit from Silver? Silver would make a very good investment. It is always in demand and is used extensively. Back in the day, people used to collect precious metals and trade it for other necessities in life. These days it isn’t necessary to actually hold silver for trading. Silver is physically held now only as jewelry.

Why invest in Silver opposed to the Stock Market?

So why would Silver be preferred over investing on a company in the stock market. Silver and Gold tend to perform different roles compared to stocks. Silver and the Stock Markets have an inverse relationship. When the price of stocks go down, the price of precious metals go up because their demand increases because Gold and Silver are considered hedges against inflation and risk.

But over the 10 year horizon since 2000, Silver has performed better than the Stock Market and this is a sign to Investors who see precious metals as a one dimensional investment. Investing in precious metal can be highly profitable. Precious metal should be in the portfolio of an Investor who likes to diversify his investments and want to cut his risk and get high returns.

silver trading

There are a host of factors that decide the price of Silver. Silver is a bit volatile in its price movements compared to that of gold. The primary factor that affects Silver prices is actually gold.

Gold’s effect on price of Silver is direct. When Investors look to precious metals as an Investment, they primarily look at investing in gold and that interest seeps into silver as well. So when the price of gold increases, silver price increases as well. It’s the demand for precious metals.

Another reason is the Industrial demand for silver. As we’ve seen, the use of silver has increased. The technology industry uses silver extensively for a lot of the ubiquitous products like semi-conductors and microchips. This physical industrial demand affects prices.

There are private institutional investors who bet big specifically with silver. Did you know that Warren Buffet purchased close to 4,000 metric tons worth of silver in 1997. This was more than $580 million. There are many private ETF’s (Exchange traded funds) that take positions on silver and this definitely affects the price of silver.

The USD and silver have an inverse relationship. This means, when silver goes down  the USD goes up.  During the recession, the price of precious metals goes down and the USD goes up because currency is seen as a safe bet during the negative growth phase.

The stock market has a huge role to play in the price of silver. Unfortunately for investors, the relationship between silver and the stock market isn’t a straightforward play, i.e. it isn’t a direct relationship. In some cases the market going down has helped in silver prices going up because of the demand for alternative investments. After the recession, the markets went up and so did the price of silver. In this case it was more to do with investors gaining confidence in investments overall.

How do you invest in silver?

You can invest in silver through commodities trading. The commodities trading market is similar to that of the stock market but for physical commodities. These commodities aren’t manufactured products but more or natural products like coffee, cocoa etc. The commodities market also includes mined metals like gold and silver. With the commodities market a retail investor is exposed to the gold and silver market without having to face the issues of physical trading.

Exchange traded commodities is the medium through which transactions happen. ETC’s track the price of movements of the underlying product. So a person can see historical prices and invest based on past price history and so on. ETC’s actually physically hold the silver in their warehouses and they charge a fee for maintaining this. Although you wouldn’t be required to hold silver physically, you can get hold of the physical silver and even get it delivered to your house. If you want to sell your physical silver then the product will have to be officially tested before it’s sold to avoid any fraud.

The ETC’s are a bit like Mutual Funds. They work on a NAV (Net Asset Value) model. There are other investment types like Inverse ETC’s that are complex instruments which is the exact opposite of an ETC. When the silver price goes down then the Inverse ETC goes up. Leveraged ETC’s are set up in a way where the movements of the underlying commodity are exaggerated two to three times.