Silver as an investment

  Silver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in the United States. (It continued to be used in coinage until 1964, when the intrinsic value of the silver approached to overtake the coins' face values.)

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Silver price

The price of silver has been notoriously volatile as it can fluctuate between industrial and store of value demands. At times this can cause wide ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver ratio is often analyzed by traders and investors. Over most of the 19th century, the gold/silver ratio was fixed by law in Europe and the United States at 1:15.5, which meant that one troy ounce of gold would buy 15.5 ounces of silver [1]. The average gold/silver ratio during the 20th century, however, was 1:47.0 [2].

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per oz. for the first time by late April of 2006. The monthly average price of silver was $12.61 per ounce during April 2006, and the spot price was around $15.78 per ounce on November 6 2007 [3].

Factors influencing the silver price

Private and institutional investors

From 1973 the Hunt brothers began cornering the market in silver, helping to cause a spike in 1980 of $49.45 per ounce and a reduction of the gold/silver ratio down to 1:17.0 (gold also peaked in 1980, at $850 per ounce) [4]. However a combination of changed trading rules on the New York Mercantile Exchange (NYMEX) and the intervention of the Federal Reserve put an end to the game. In 1997, Warren Buffett purchased 130 million ounces (4,000 metric tons) of silver at $4.41 per ounce (total value $572 million). Similar to gold, the silver price has more than doubled in value against the United States dollar since December 2001 [5]. On May 6, 2006 Buffett announced to shareholders that his company no longer held any silver. In April 2006 iShares launched a silver exchange-traded fund, called the iShares Silver Trust (NYSE: SLV), which as of April 2007 held 130 million ounces of silver as reserves.

The large concentrated short position

The CFTC publishes a weekly Commitment of Traders Report which shows that the four or fewer largest traders are holding 90% of all short silver contracts. This level of concentration is unprecedented in any commodity, and should arouse suspicion. Furthermore, these four or fewer traders are short a total of 245 million ounces (as of April 2007), which is equivalent to 140 days of production. [6]

Industrial demand

The use of silver in items such as electrical appliances and medical products has increased since 2001. New applications for silver are being explored in batteries, superconductors and microcircuits, which may further increase non-investment demand. The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long term rise in industrial usage.[7] Even so, due to the advent of digital cameras the enormous reduction in the use of silver halide-based photographic film has tended to offset this.

Methods of investing in silver

Bars

A traditional way of investing in silver is by buying actual bullion bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter at major banks.

Physical silver, such as bars or coins, may be stored in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer.

Various sizes of silver bars:

• 1000 oz troy bars. – These bars weigh about 68 pounds avoirdupois (31 kg), and vary about 10% as to weight, as bars range from 900 oz to about 1100 oz (28 to 34 kg). These are COMEX good delivery bars.
• 100 oz bars. – These bars weigh 6.8 pounds (3.11 kg), and are among the most popular with retail investors. Popular brands are Engelhard and Johnson Matthey. Those two brands cost a bit more, usually about 40-50 cents per ounce above the spot price, but that price may vary with market conditions.
• Odd weight retail bars. – These bars cost less, and generally have a wider spread, due to the extra work it takes to calculate their value, and extra risk due to the lack of good brand name.
• 1 kilogram bars (32.15 oz)
• 10 oz bars and 1 oz bars (311 and 31.1 g)

Coins

Main article: Silver coin

Buying silver coins is another popular method of physically holding silver. One example is the 99.99% pure Canadian Silver Maple Leaf. Coins may be minted as either fine silver or junk silver, the latter being older coins with a smaller percentage of silver. For example, U.S. pre-1965 half dollars, dimes, and quarters are 25 grams per dollar of face value and 90% silver (22½ g silver per dollar). (1965-1970 and 1975-1976 Kennedy half dollars are "clad" in a silver alloy and contain about one-third of the pre-1965 issues.)

Junk silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom and Canada, and 1945 in Australia. These coins are 92.5% silver, and are in the form of (in decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences, and threepence. The tiny threepence weighs 1.41 grams, and the Crowns are 28.27 grams (1.54 grams heavier than a US $1). Canada produced silver coins with 80% silver content from 1920 to 1967.

Rounds

Some hard money enthusiatists use .999 fine silver rounds as a store of value. A cross between bars and coins, silver rounds are produced by a huge array of mints, generally contain an ounce of silver in the shape of a coin but have no status as legal tender. Rounds can be ordered with a custom design stamped on the faces or in assorted batches.

Certificates

Main article: Silver certificate

A certificate of ownership can be held by silver investors instead of storing the actual silver bullion. Silver certificates allow investors to buy and sell the security without the difficulties associated with the transfer of actual physical silver. The Perth Mint Certificate Program (PMCP) is the only government guaranteed silver certificate program in the world.

The U.S. dollar has been issued as silver certificates in the past, including in denominations of $10, $5, and $1.

Accounts

Most Swiss banks offer silver accounts where silver can be instantly bought or sold just like any foreign currency. Unlike physical silver, the customer does not own the actual metal, but rather has a claim against the bank for a certain quantity of metal. Many digital gold currency providers, such as e-gold and GoldMoney, offer silver as an alternative to gold and work on a similar principle. Other electronic silver accounts include the eLibertyDollar and Phoenix Silver. Silver accounts are backed through unallocated or allocated silver storage.

Exchange-traded funds

Exchange-traded funds (or ETFs) represent a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars. The silver ETFs are:

• iShares Silver Trust (NYSE: SLV), launched in April 2006 by iShares.
• Central Fund of Canada (TSX: CEF.NV.A, NYSE: CEF) has 45% of its reserves held in silver with the remainder invested in gold.
• In September 2006 ETF Securities launched ETFS Silver (LSE: SLVR) which tracks the DJ-AIG Silver Sub-Index, and later in April 2007 ETFS Physical Silver (LSE: PHAG) which is backed by allocated silver bullion.

Spread betting

Firms such as Cantor Index and IG Index, both from the UK offer the ability to take a bet on the price of silver through what is known as a spread bet.

Derivatives

Derivatives, such as silver futures and options, currently trade on various exchanges around the world. In the U.S., silver futures are primarily traded on COMEX (Commodity Exchange) which is a subsidiary of the New York Mercantile Exchange. In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 5 kg silver futures [8].

Mining companies

See also:

These do not represent silver at all, but rather are shares in companies that mine silver. Companies rarely mine silver alone, as normally silver is found within, or alongside, ore containing other metals, such as tin, lead, zinc or copper. Therefore shares are also a base metal investment, rather than solely a silver investment. As with all mining shares, there are many other factors to take into account when evaluating the share price, other than simply the commodity price. Instead of personally selecting individual companies, some investors prefer spreading their risk by investing in precious metal mining mutual funds.

Taxation

In many tax regimes, silver does not hold the special position that is often afforded to gold. For example, in the European Union the trading of recognised gold coins and bullion products is VAT exempt, but no such allowance is given to silver. This makes investment in silver coins or bullion less attractive for the private investor, due to the extra premium on purchases represented by the irrecoverable VAT (charged at 17.5% in the United Kingdom, and 19% in Germany, for example).

Other taxes such as capital gains tax may apply for individuals depending on citizenship and if the asset is sold at increased value.

See also

• Diamonds as an investment
• Gold as an investment
• Palladium as an investment
• Platinum as an investment
• Full-reserve banking
• Precious metal
• Commodity Fetishism