In my previous posts here and here, I have analyzed the fundamental parameters of this important metal—demand, supply and reserves—and recommended not only investing in gold, but also in silver, with a long-term perspective. In this article, I will compare the different ways to invest in silver:
- Silver bars and coins
- Silver future contracts
- Silver ETFs and ETNs
- Shares of silver companies
Click to enlarge
First let us compare the historical return of the different investment instruments. The table below presents the historical price appreciation and the Compound Annual Growth Rate (CAGR) between December 12, 1996, and July 20, 2012, for the following investing instruments: silver continuous leading future contract; silver continuous futures contract adjusted for rollover of the expiring contract; and the stocks of these companies, which also consider the dividend distribution: Pan American Silver (PAAS) and Silver Standard Resources (SSRI). Silver ETFs did not yet exist in 1996, so this calculation does not take them into account. The price appreciation of silver bars and coins should have been the same as the unadjusted futures contract.
The table clearly shows that the return from holding silver bars, namely the return of the unadjusted futures contract, 470% or 11.84% annually, was by far the best. Long-term investors in futures contracts should roll over expiring contracts. Because of the contango effect, the return was only 196% or 7.23% annually, without taking in account trade commissions. The return of holding shares of the silver company Pan American Silver was 134.5%, or 5.63% annually, and that of Silver Standard Resources was 176%, or 6.75% annually.
In order to include the silver ETF, iShares Silver Trust (SLV), which was launched on April 2006, an identical study was performed on a much shorter period, from April 28, 2006, to July 20, 2012. The results are shown in the table below.
On that period, holding shares of Silver Wheaton Corp. (SLW) has given the best return 138.3% or 14.95% annually. Holding shares of the silver companies have given a painful loss, Pan American Silver lost 42.1% and Silver Standard Resources lost 45.7%. The return on holding silver bars for that period was 100.3% or 11.8% annually, and the return of the continuous futures contract was only 69.9% or 8.88% annually, because of the contango effect.
The return from investing in the silver ETF, iShares Silver Trust, 91.7% or 69.9% annually was better than the return from investing in future contracts because the fund invests in physical silver. So there is no loss because of the need to roll over contracts. The return of the fund was less than the unadjusted futures contract because of the trust's expenses and liabilities.
Buying silver bars and coins might be a good investment, but because the price of silver is only 1.7% the price of gold, it needs much more storage place. Furthermore, depositing silver bars in a bank safe costs money, and keeping them at home costs an additional insurance fee. The ETF SLV is also a good investment in silver, and someone very bullish about silver can invest in the ProShares Ultra Silver ETF (AGQ), which is double leveraged to the price of silver.
Holding Silver Wheaton Corp. shares since 2006 has been very profitable, this company has a very good business model, see here for a recommended review about the company. Silver future contracts are excellent for trading, but because of the contango effect and rollover costs, it is less suitable for long term investment. Investing in stocks of the silver companies: Pan American Silver and Silver Standard Resources have given quite good results if have been held since 1996 but terrible results since 2006.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.