How To Invest In Silver: Directly & Indirectly
Investors who want to invest in silver have several options to consider, including owning physical silver, investing in companies that mine silver, investing in silver ETFs or mutual funds or futures contracts, and/or investing in silver futures contracts outright.
Investing in precious metals like silver has long been a popular way for investors to diversify their portfolio with assets that are less correlated to stocks, bonds, and other investments and offset concerns like inflation and currency depreciation.
Note: Some investors argue that precious metals are a poor inflation hedge, but it’s still why a lot of people buy them.
What Is Silver?
Silver is a commodity; a precious metal, with uses in a wide range of industrial end-markets. Silver also has a long history of use in jewelry, coinage, and as a store of value given its relatively high value-to-weight ratio.
Some brokerages do allow investors to purchase physical silver, but there are typically minimum investment amounts and higher fees/commissions than is typical for stock, bond, or mutual fund transactions (including delivery or storage fees). Stock brokerages that do not handle physical silver transactions will still allow investors to buy silver ETFs, as well as shares of silver mining companies and mining company ETFs.
Individuals can also buy physical silver from dealers specializing in precious metals. Trading in futures contracts is another way to gain exposure to silver, but generally requires an account with a commodities brokerage.
Tip: Physical silver is not a financial asset, but rather a physical asset (a commodity) with financial value.
5 Options for Investing In Silver
Investors who want to invest in silver have several options to consider, including both direct investing (owning silver outright), and indirect investing like buying into ETFs or futures contracts. Options include:
- Owning physical silver
- Investing in companies that mine silver
- Investing in exchange traded funds (or ETFs) that own physical silver or silver futures contracts
- Investing in precious metals mutual funds may track silver specifically.
- Investing in silver futures contracts outright
Some of these options can be quite expensive, while others offer only indirect or unpredictable exposure to spot silver prices.
Investing In Silver Directly
The most direct way to own silver is to own physical silver, whether in the form of bullion or numismatic silver.
Buying Silver Bullion
Most investors looking to hold physical silver will buy bullion in the form of ingots or coins. Buying these is fairly simple, an investor can walk into a coin store or bullion dealer off the street and walk out with silver, but dealer bid/ask spreads are often quite wide relative to typical bid/ask spreads for stocks and bonds, often around 5%-6%, per Money.org. Physical bullion also requires secure storage (and shipping if purchased online), whether that be a safe, safety deposit box, or some other arrangement.
There are companies that deal in precious metals who will not only sell physical silver (bullion, coins, etc.) to customers, but also help arrange for the secure storage of the silver for a fee if the customer does not want to keep it on-premise. It is also possible to have a precious metals IRA (though not all brokerages offer them), and for these, investors must arrange and pay for the services of a custodian and depository; under IRS rules, bullion owned in a precious metals IRA must be stored in an approved depository.
Buying Numismatic Silver
Numismatic silver is a much more complicated way of owning silver. The U.S. Mint produced silver coins for use as currency until 1964, and these coins are valued not only for their silver content, but also their value to collectors based upon their scarcity, condition, and popularity. As with ingots or bullion coins, bid/ask spreads tend to be wide and secure storage is recommended, and particularly valuable specimens may be difficult to sell quickly at close to fair value.
Pros of Owning Physical Silver
The primary advantage to owning physical silver is psychological—some investors simply feel more comfortable knowing they have bullion or coins stored in an accessible safe or a bank vault.
Owning numismatic silver certainly has psychological value for collectors who enjoy the hobby, but that is not an investment consideration.
Cons of Owning Physical Silver
Owning physical silver may provide the most peace of mind and satisfaction for investors who believe they need immediate access to precious metals in case of emergency, but it can also be one of the least efficient and most expensive ways to own silver.
Disadvantages include:
- High fees to buy and sell: relative to financial assets like stocks
- Fees related to securing physical silver
- Custodial fees for silver held in an IRA
- All fees scale with the value of the investment, meaning they are disproportionately larger for investors with smaller amounts available to invest.
- Risk of theft: if investors forego secure storage
- Often-wide bid/ask spreads to buy and sell
- The time and inconvenience it can take to exchange silver for other assets, like cash.
Numismatic silver has the added disadvantage of requiring knowledge of the coin market to buy and sell effectively.
Investing in Silver Indirectly
Given the inconveniences involved in owning and/or trading physical silver, many investors will prefer indirect financial instruments that give them the opportunity to gain exposure to the price movements of silver without the same drawbacks and costs of physical silver. The primary ways to invest in silver indirectly include:
- Investing in the shares of silver mining companies or silver mining company ETFs
- Buying silver-tracking ETFs
- Buying silver futures
Investors may wish to visit Seeking Alpha's Commodity ETF page.
Tip: Indirect silver instruments offer the possibility of betting on downside movements - investors can use some instruments to profit from declines in the value of the metal.
1. Silver Mining Company Stocks
Buying the stocks of companies that mine silver (or simply own underground reserves) is an indirect method of investing in silver. Although the prices of silver mining company stocks typically rise when silver prices rise, they do not typically move in a 1-to-1 ratio. Silver prices and silver miner stock prices can in fact diverge significantly over time.
Buying Mining Company Stocks
The main benefit and risk of using mining company stocks to invest in silver is the possibility of idiosyncratic performance. Mining companies are more than just silver proxies, as the companies must discover and exploit silver deposits, and do so in a cost-efficient manner. Companies that are better at locating low-cost deposits and mining efficiently will outperform less-capable miners and can outperform the underlying price of silver, sometimes to a significant degree, while less competent mining companies can underperform even in a period of rising silver prices.
Tip: Investing in mining companies is a relatively inefficient way of playing a thesis on silver prices, as those idiosyncratic factors can outweigh the underlying move in silver prices.
Buying Silver Mining Company ETFs
Buying the shares of an ETF that focuses on silver mining companies is another option. While ETFs will charge management fees, and smaller funds may be illiquid, ETFs allow investors to own a broader portfolio of companies, reducing company-specific idiosyncratic risk.
2. Silver ETFs
Investors can own silver indirectly by owning shares of a silver ETF that owns physical silver or silver futures contracts. Structured as guarantor trusts, the shares of physical silver ETFs are backed by physical silver stored in a vault and overseen by a custodian. Physical silver ETFs attempt to track the spot price of silver as closely as possible, but there will be some underperformance due to the fund fees that go toward paying for the storage and insurance of the physical silver, various administrative costs, and the profits for the sponsoring company.
iShares Silver Trust: Largest Silver ETF
The iShares Silver Trust (SLV), physical silver ETF structured as a guarantor trust, is by far the largest silver ETF on the market as of this writing, with total assets of almost $13B. The next-largest physical silver ETF has total assets of just under $1B.
ETFs like SLV have the advantage of being liquid and accessible, with minimum investment sizes limited to the cost of a single share plus commissions. Larger, liquid ETFs trade with tight spreads and it is relatively easy to buy and sell large amounts without meaningfully impacting the price.
Tip: Investors should note that, as of this writing, the IRS treats investments in silver ETFs like investments in the physical commodity, and that means gains are taxed at the collectibles tax rate, which is presently higher than the long-term capital gains tax rate.
Buying Silver ETFs with Silver Futures Contracts
Investors can also invest in silver ETFs that hold silver futures contracts instead of physical silver bullion. Structured as commodity pools, a private investment fund that combines (pools) investor contributions to trade commodity futures, these ETFs use futures to either replicate the movement of spot silver prices or employ leverage to magnify the underlying movement in silver prices.
Consider the following before investing:
- ETFs that use futures are subject to risks related to the futures curve, and for long investments specifically an upward sloping futures curve (contango).
- Futures-based ETFs are treated like futures for tax purposes, with gains and losses being treated as 60% long-term, 40% short-term, and with positions marked to market at year-end (creating a gain or loss on unsold positions).
- Leveraged ETFs have additional risks, including the constant leverage trap from resetting their leverage on a daily basis, and are poor choices for investors who wish to maintain positions for the longer term.
3. Futures Contracts
Investors can buy or sell silver futures contracts to gain exposure to changes in the price of silver. Futures contracts do technically give investors an opportunity to acquire physical silver, but in practice, it is difficult to find retail commodity brokerages that will allow for physical delivery.
Investment considerations include the following:
- As futures contracts offer significant leverage, investors who choose this option will see significantly greater gains or losses relative to unleveraged investments.
- Because futures contracts have expiration dates, investors who wish to maintain long-term positions will have to roll their positions. Rolling futures positions may subject an investor to value erosion if the futures curve is upward sloping, and usually incurs trading commissions or rollover fees.
- They have minimum investment requirements based on the size of the contract. For example, the Micro Silver futures contract is for 1,000 troy ounces, the smallest futures contract for silver, and as of this writing requires a minimum maintenance margin of $4,250 per contract.
Source: cmegroup.com
Researching Silver Investments
The research process for commodities like silver is meaningfully different than for individual stocks or corporate bonds. Supply can be fairly predictable in the short run, but demand will vary significantly based upon global economic activity and investor sentiment regarding growth, inflation, and interest rates, which are notoriously hard to predict.
The CME Group provides daily reports on metal delivery notices, as well as warehouse and depository stocks and the number of open futures contracts (“open interest”). Major brokerages generally provide coverage of precious metals, including price forecasts, and there are many newsletters and websites that offer coverage of the silver market.
Pros & Cons of Investing in Silver
Pros
- The price of silver has historically had low correlation to the returns of other widely-held financial assets like stocks and bonds. While the exact numbers vary depending on the time horizon studied, silver typically has a low correlation to the S&P 500 (0.20 to 0.30), and has had negative correlation for some periods of time. Owning assets with low correlation in a portfolio helps to improve returns and reduce overall portfolio risk over time.
- Silver is a physical asset with finite availability, as there is only so much accessible silver on the planet. With a long history of usage as currency and a store of value, it is unlikely that silver would ever become completely worthless, unlike a bond of a defaulted borrower or a stock of a bankrupt company. Physical silver also has the advantage of being a real physical asset. In a true crisis, silver is portable and useful and is not just a legal claim to another asset.
- Precious metals are frequently promoted for their value as a defense against inflation and/or a weaker local currency, although the data on the efficacy of silver as an inflation hedge is mixed at best.
Cons
- Physical silver requires secure storage and is usually subject to sizable bid/ask spreads.
- As an industrial metal, demand for silver can fall significantly during periods of economic weakness, undermining the argument for holding silver as a hedge against economic downturns.
- Silver ETFs or futures costs expose investors to costs that will create a drag on returns, despite being more cost-effective than owning physical silver. Investing in silver futures also requires regular activity to manage position rollovers.
- Silver itself doesn't yield anything to investors. There are no dividends paid for holding physical silver.
Bottom Line
Investors who wish to add silver to their portfolio have a wide range of options. Exposure to silver can be achieved by owning physical bars or coins, owning the stocks of silver mining companies, owning ETFs or mutual funds that hold physical silver or silver futures contracts, or owning futures contracts directly. Investors should carefully consider their needs, and assess the advantages and disadvantages of various silver investment types as part of their due diligence process before investing.
This article was written by
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