Silver Investing

When thinking about silver investing, it’s important to remember that precious metals have long been a store of value and worth. Dating back to ancient times, precious metals like silver and gold have remained valuable for their buying power and ability to provide financial protection when government-run tools like currency suddenly become worthless. And, among precious metals, it is silver that offers investors a unique opportunity to produce significant investment gain.
This guide will provide a solid understanding of how to use silver as an investment portfolio hedge and to achieve investment gains. Both benefits are especially critical to investors when the markets are volatile and uncertain.

What Is Silver Investing and How Does It Work?

Origins and background

Silver as a precious metal has been around for a very long time. Ancient cultures quickly recognized the value of silver as a metal. It is often found as a byproduct from copper and gold mining. Once societies began to go beyond basic barter and goods-trading, silver along with gold and copper became the basis for the first country-level currencies.

The metals broke down into common values that everyone could understand. This applied even if they could not understand each other’s languages. This became extremely important for trade. In particular when the Persians and Greeks began expanding their empires far beyond their normal regions. Trade was able to reach farther and move more goods with the common understanding of shared currency value.

By the time the Roman Empire arrived, currency with metal coins was commonplace. Today, many a farm field in England has turned up as a hiding place for Roman coin caches, basically buried treasure in the form of large Roman vases filled with copper, silver, and gold coins. While their owners are long gone, the value of the metal still exists, even putting aside the archaeological value of the find.

Today, silver, along with other precious metals, are no longer official government currencies. Those functions have been replaced by fiat currencies. A fiat currency is paper money based on the strength of the given nation’s economy and faith in the government itself.

However, precious physical metals, such as silver, gold and palladium, are still regularly traded as commodities and act as a reliable store of value. A good portion of silver production is for industrial purposes. The amount used for jewelry and investment is a smaller portion of annual production. That said, silver continues to remain in demand, and its value continues to provide a hedge against other risks such as inflation.

What are the different qualities of silver?

The quality of silver directly impacts its value, just like other precious metals. Quality is determined by purity. Most precious metal ores are too soft in their original form to be usable. While they are 100% pure, their natural form is weak and brittle.

To fix this, fabricators will melt silver ore with other metals to create an alloy that is stronger. From this, manufacturers can produce silver products, whether they are in the form of coins, parts, jewelry, wiring, or other items.

The extent to which silver is mixed into alloys, however, has an offset to its value. As more external metals are mixed in, the strength increases because the quantity of silver goes down. In short, its purity is less. Thus, higher purity silver is more valuable, and silver that is the closest to 100% purity is the most valuable version of the metal available.

How is silver measured?

Silver is measured by a metric known as a troy ounce. A troy ounce of silver weighs 31.1034768 grams. By agreeing upon specific metrics for silver, people can trade it internationally because once certified, the given silver amount is a known purity, quality, and quantity. This makes it an ideal value commodity on any financial market.

Which countries are the top three in silver production?

While you can find silver around the world, the highest concentrations for mining are in Mexico, Peru, and China. According to the U.S. Geological Survey, global silver mine production in 2020 totaled an estimated 25,000 metric tons. Of that, Mexico produced 5,600 metric tons, Peru produced 3,400 metric tons, and China produced 3,200 metric tons.

The Differences Between Gold and Silver Investing

Obviously, there is a dramatic difference in investing value between gold and silver. As of the writing of this article, gold trades in the range of $1,800 USD per troy ounce, while silver is far lower in the low-to-mid $20s USD. Why such a significant difference? Much of the inherent value perception involves the amount of gold available to the consumer versus silver. The yellow metal is simply restricted far more, with government central banks holding onto much of what is available and not used for industrial purposes. That makes the remainder scarcer, driving up demand.

Silver, on the other hand, is far more available to consumers and not in demand for government-backing the way gold is. As a result, it has less of a demand and far more availability as a commodity compared to gold. Silver is still a precious metal, just not on the scale of where gold is pricewise.

Are There Advantages to Investing in Silver Over Gold?

The key advantage of silver over gold tends to be the lower metal’s high tendency for price fluctuations. Silver is more volatile than gold because it trades on commodity markets more frequently. This means that silver has a higher possibility of making significant gains on its value compared to gold.

For example, if a troy ounce of gold goes up, it’s maybe $50 in a rise, possibly $100. That amount on the overall price of a gold troy ounce is about a 5% gain (as of this writing). So, it can take a considerable amount of time for gold to appreciate for a significant gain. Silver, on the other hand, costs on the market around $22 per ounce as of this writing. It could rise to $35 in a demand surge. That represents a 59% value gain.

However, with volatility comes greater downside risk. Just as silver can rise significantly, far more than gold, it can also drop. This has happened repeatedly, catching investors unaware who experience silver’s volatility for the first time. When drops occur, some investors opt to hold their ground and wait for the rise to occur again if they didn’t get out quickly. Timing the market has been a fruitless game for many, as market corrections can happen at any time. Many successful silver investors tend to buy and hold and only sell when the timing suits their purposes for a sizable gain.

Three Factors That Move the Price of Silver

Supply and Demand

The most fundamental influence on the price of silver is supply and demand. These economic push-and-tug forces move the price up and down based on the commodity market supply available. When supply is lower, the level of demand drives the price of silver per troy ounce upward. When the opposite occurs, silver drops in value.

This up and down in price point can be steady or extremely volatile. It depends on what is going on with silver supply and how much is needed for industrial consumption (the main driver of silver purchasing).

One of the recent aspects driving up demand for silver is technology. As more appliances, vehicles, systems, computers, and assemblies use silver for electrical connections, the price goes up with the related demand. These consumption players didn’t exist three or four decades ago. Today’s silver market is a quite different one compared to a generation ago.

Government Policies

A government’s economic policies can exert pressure that has an influence on silver pricing over time. An example of this is when a government increases the money supply to pay for government expenditures. As the money supply increases, the value of the currency decreases. This reduces consumers’ purchasing power and causes inflation, which is the sustained increase in the cost of goods and services in an economy.

In this situation, investors look to get out of cash as the value of the currency continues to plummet. They may be particularly eager to find an asset that acts as a hedge (or protection) against inflation. This is especially the case if the government also enacts policies that devalue the nation’s currency. This frequently happens if the nation is experiencing extreme inflation, known as hyperinflation.

Because many investors consider precious metals—such as silver—to be a hedge against inflation, they may increase their purchases. This increased demand leads to rising prices in silver.

Mining Restrictions and Challenges

The third factor shaping silver pricing relates to mining restrictions and challenges. Again, the major consumer of silver involves industrial players. They purchase silver in bulk for production and manufacturing. Technology applies a growing pressure on demand, so their need tends to be in a state of progressive increase.

Mining companies and conglomerates know their primary market buyers are industry players. As a result they plan and produce accordingly. However, when slowdowns or difficulties restrict production, this reduces the new supply of silver coming into the market. That in turn drives up the price for the silver available.

There are considerable upfront costs to get a mining operation from the exploration phase to actual production. Long before they excavate a single ounce, silver mining companies incur expensive engineering and surveying costs. They must abide by government regulations, including environmental requirements, which can require them to make costly changes to their mining practices.

They often operate in countries where labor disputes, civil unrest, difficult terrain, and weather disasters can all cause a mine to unexpectedly shut down. To turn a profit, mining companies must factor in all these expenses, which in turn impacts the cost-per-ounce of silver.

How Should a Novice Start Their Silver Investing?

The best place for a beginner to start with silver investing is first to practice by paper trading. This is simple to do. Multiple websites track the price of silver by the minute, hourly, and daily. Kitco, for example, is a good place to start. The site has information about silver, historical charts, pricing history, and more.

For the purposes of understanding investing, start off with an imaginary $1,000 as an investment. Then track the behavior on a spreadsheet. Watch how the market behaves over time and what it does to the fake investment. Once you have a feeling for how the market runs, how fluctuations occur, and how volatility impacts pricing, you will have a far better idea of what investing in silver means. If still interested, then it is time to get serious.

What is the difference between allocated and unallocated silver?

Beginners should watch out for the differences between allocated and unallocated silver. Most people are familiar with allocated silver. This is when you buy silver, and you physically own the asset as well as control where you store it.

An investor in unallocated silver, however, does not own the silver. Instead, the investor works with a bank or dealer and invests in a credit or share of a silver holding. The bank or dealer owns the physical silver, but issues shares or credits in the form of a paper certificate to buyers. Understanding the difference between allocated and unallocated is important. You do want any surprises when starting to invest in silver with regarding your ownership rights.

Where Should an Investor Buy and Sell Their Silver?

Buying silver is possible through several sources. Some are better than others depending on a person’s particular situation, risk tolerance, and buying tools. For example, some folks never want to deal with a computer and only want to buy in person. A physical broker is going to be the viable approach.

Others are fine with buying but do not want to be in the metal itself. Instead, they want to profit from those who work in silver markets. Investing in the stock of mining companies through an online brokerage makes more sense. There is no single perfect solution for all silver investors, which is why there are diverse ways to invest.

Brokers of Physical Silver

These operators are businesses in themselves. They represent the traditional method for buying precious metals. They buy inventory from those selling, and sell to those wanting to invest.

You can buy physical silver from brokers in different forms such as silver bullion coins and silver bars. Ideally, a beginner should focus on government-issued bullion. These are recognized immediately as authentic, government-issued, and verified. That makes them easier to liquidate after the fact compared to private-manufactured silver assets.

For example, the U.S. Mint produces the American Eagle silver bullion coin. These are Congressionally authorized coins. The U.S. government guarantees each coin’s weight and fineness of one troy ounce of .999 fine silver. Because of this guarantee, investors can buy them knowing the coins contain the stated amount of silver.

Rather than selling its silver directly to investors, the U.S. Mint uses a different distribution system. They distribute their bullion through a network of authorized purchasers that then sell to the public. If you are interested in buying silver bullion coins, go to the official U.S. Mint government website. Review the instructions for locating an authorized purchaser.

Some authorized purchasers might also sell silver products from other countries. Examples inlcude the Canadian Silver Maple Leaf, the British Silver Britannia, or the Australian Perth Mint coins. To protect yourself from fraud, purchase from authorized purchasers or a reputable dealer. Be sure to check out the credentials of anyone you do business with and take particular care with online transactions.

Digital Brokers

Digital brokers are similar to physical ones, but they operate on the Internet. They take purchases and sell inventory to parties through shipping. Many brokers are reputable, but there is also a lot of room for shady operations. Scams and poor-quality product have been a problem for online buyers. This is especially the case for those buying from silver sellers through auction sites like eBay. Generally, a buyer should avoid these sources and buy from authorized purchasers recommended by their government.

Exchange Traded Funds (ETFs)

Some investors prefer not to hold physical silver because of the insurance and storage costs involved. Instead, they gain exposure to the silver markets through exchange traded funds (ETFs).

Silver ETFs are electronic tools that track the price of silver. Typically, a silver ETF will invest in various hard silver assets. Some ETFs may also invest in silver futures and options. These are leveraged types of investments that we discuss in more detail below.

One advantage of silver ETFs is their convenience. You can buy and sell the ETF shares through your brokerage account just as you would a regular stock.

Derivatives

Investors who trade futures contracts in silver are trading a type of financial contract called a derivative. Two or more parties enter a contract that enables them to make leveraged bets on the future price of silver.

If a trader borrows money from their broker to make the trade (a process called “buying on margin”), they may be forced to deposit additional margin (that is cash) to maintain their position if the trade goes against them. This is one of the primary risks of derivatives trading.

Buying an option on a futures contract is another type of derivative. To make a profit, the trader must correctly identify the timing and size of a price movement in silver futures.

Many novice derivative traders have lost everything, playing their hand unaware of the risks involved. This is an area of investing you should avoid until you are extremely comfortable and experienced with market trading. Many professionals still avoid derivatives—the risk involved being simply too dangerous financially.

Companies That Mine for Silver

Some investors prefer to buy stock in companies that do the mining of silver. Silver mining is a multi-phase process that includes exploration, extraction, processing, and refining. Investors who buy stock in silver miners expect that as the price of silver increases, so will the value of their shares in the company. Overall, the approach assumes that the health of the silver market will translate to the success of the company. This would be achieved by an increase in the company’s profits, and in turn increase the stock price.

However, it’s important to note that there are other factors that can impact a company’s share price beyond the price of silver itself. In the U.S., state and federal agencies heavily regulate the mining industry. It can take years for a mining company to gain the needed approvals to begin extraction. In fact, some companies never get beyond the development and exploration phase.

During this time, the mining company (called a “junior miner”) will typically have no revenue and will have heavy expenses. An investor who buys shares of a junior miner is taking on more risk than an investor who buys stock in a senior miner that already has a proven mine and revenue.

Pitfalls to Avoid

The big mistake to avoid with all investing is investing money that cannot be lost. You should protect any money you need for critical payments, food, rent, and other essential costs in a regular savings account. The funds you invest in new markets should be those monies that you can afford to see decline. In a worst case scenario, that you can  lose them entirely.

Second, beginners should not expect profits in a day. Most investors in silver and other assets see profits over time as the markets rise from their original positions. One approach is to buy periodic amounts whether the market is going up or down. This allows the investor to make gains at different positions compared to just one entry point. It takes a bit of tracking and spreadsheet work, but it can pay off with a steady stream of profits as the market changes over time.

Third, a smart investor is not greedy. While everyone hopes for a great win, the effective investor makes a profit by hitting a target. Focus on reaching a target and selling to lock in your gains when it happens. The market might go higher, but do not chase it. Instead, those who stay objective consistently profit while those who attempt to time the market for maximum gains may end up losing much more.

What Are the Risks With Silver Investing?

Risk of Fraud

Scammers and fraud are always going to be a problem. Anywhere there is money being invested, there will also be those trying to steal it. For beginners in silver investing, the best approach is to stay connected with well-known, certified brokers and avoid big promises or Internet operations that have no background.

Most scammers tend to set up quick pages, offer gains too good to be true, and then they disappear as soon as someone makes a big investment. Avoid these. It might seem to cost more in fees to deal with an established broker or silver seller, but the protection is worth it.

Storage Costs

If you choose to invest in physical silver, you will need a place to store it for safety. While a deposit box at the bank works at first, at some point it may not be big enough. An investor then needs to consider a private safe at home or renting storage space with a broker.

Renting professionally maintained space might be more secure, but the ongoing cost eats into profits. Buying a home safe is usually a one-time cost, but it is only as secure as the private property and those who know about the safe’s presence.

Lack of Liquidity

When investing in silver, you will need to consider how important it is for you to liquidate holdings quickly. If you anticipate needing to cash out with as little hassle as possible, a silver ETF might be a better option. That is because physical silver takes time to convert back to cash.

Even when you have a dependable broker to work with, the metal still must be evaluated, measured, and then finally bought. If you sell your silver remotely, you will also have the risk of shipping the silver. You will have the cost of insurance for the shipment and you will need to wait for payment.

How Is Silver Investing Treated Tax-wise?

Taxation in the United States

In the U.S., the tax treatment of silver investments varies depending on the type of investment the investor holds and how long they hold the investment.

• Physical silver: This refers to holding an investment in physical assets, such as silver bullion coins, bars, ingots, or rare coins. The Internal Revenue Service (IRS) classifies physical silver as collectibles. According to Investopedia, the investor will owe capital gains tax on physical silver only after selling the silver and if the investor held the silver for more than one year. As of this writing and per Investopedia, the capital gains tax on the sale of physical silver is equal to the investor’s marginal tax rate, up to 28%. Even if an investor is in a higher tax bracket, they will still pay the 28% rate. Investors that have short-term gains on physical silver will pay a tax equal to ordinary income rates.
• Silver exchange traded funds (ETFs): According to Charles Schwab, the IRS treats investments in a precious metals ETF the same as an investment in collectibles. The Schwab article states: “The maximum long-term capital gains rate on collectibles stands at 31.8%, which is higher than the 23.8% top capital gains rate you’d pay for an equity ETF.” For short-term gains, investors will pay a rate equal to ordinary income rates. Also, be aware that these tax rates apply if you hold your ETF in a taxable brokerage account. The tax rates are different if you hold your silver investment in a tax-deferred account, such as an Individual Retirement Account (IRA). For the most up-to-date details on taxation and reporting requirements, see IRS publications Investments in Collectibles and Capital Gains and Losses.

Taxation in the United Kingdom

The UK tax treatment for physical silver varies depending on the type of silver the investor sells. The investor will owe capital gains tax (CGT) on the gain made on the sale of physical silver. However, there is a popular exception to this tax treatment, which is when investors sell bullion coins they purchased from The Royal Mint.

UK residents that sell bullion coins produced by The Royal Mint are exempt from capital gains tax. This is due to the coins’ status as legal British currency. Because of this exemption, investors can buy an unlimited amount of bullion coins produced by The Royal Mint and enjoy tax-free profits when they decide to sell.

The Royal Mint produces gold, silver, and platinum bullion coins that UK residents can buy as CGT-free investments. These include Sovereigns, Britannia coins, and the Queen’s Beasts collection.

For details, see the Royal Mint’s article on Bullion Coins and Capital Gains Tax and the UK government’s article on Capital Gains Tax.

IMPORTANT: Since tax laws are subject to change, it is important you consult your country’s tax code for the most recent regulations regarding taxation of silver investments. You may also want to consult a professional tax expert about your specific situation before making any investing decisions.

Silver Investing: General Terminology

Ag: On the periodic table of elements, silver has its own symbol—Ag.

Argent: The old English name for silver, which was generated from the Latin name, Argentum.

Ask: A precious metals dealer will set an “ask price” for a silver coin or bar. This is the selling price the dealer is willing to accept for the item.

Bid: The bid is the amount of money a precious metals dealer is willing to pay a seller to buy back a silver bullion coin or bar.

Hallmark: A hallmark is a manufacturer’s mark pressed or stamped into a silver coin, bar, or jewelry. Hallmarks are typically issued and approved by the British government certifying the given manufacturer as authentic and compliant with a specific standard of quality in purity and workmanship.

Conclusion

Silver investing is like any investment tool—it can produce great opportunities, but it also comes with real risk. The advantage of silver versus other choices is that its entry point per unit is low. Beginners can start their investing in silver without taking large risks, compared to gold, for example. Because of this, some experts believe silver provides a better opportunity for financial profit.

Silver Investing FAQs

What was the highest price recorded for silver?

The highest recorded price for silver was on January 17, 1980, when silver reached $49.45 an ounce.

Has silver ever cost more than Gold?

By some historians’ estimates, the last time silver was valued more highly than gold was probably when it was first introduced in Egypt to ancient Egyptians, who already used gold frequently and extensively. Silver’s rarity made it unique at the time and lead to a high valuation.

Is silver investing possible for novice investors?

Silver provides an ideal investment channel for beginners because it has a low cost of entry compared to other more expensive choices, especially gold. There are several straightforward ways for investors to get started. This includes buying physical silver in the form of bullion coins, buying silver ETFs, and buying stock in silver mining companies.

What makes silver bullion bars a good investment in the stock market?

A: Silver bullion bars are a reliable asset to add to your investment portfolio in the stock market. As a precious metal, they offer a level of security during turbulent economic times as they tend to retain their value. Furthermore, the increasing industrial demand for silver, particularly for its conductivity in the production of solar panels, drives its market price. Investing in silver bullion bars provides a tangible asset, diversification from traditional stocks and bonds, and potential growth based on industrial uses.

How does the Silver Institute’s forecasts impact mining stocks and precious metals investing?

A: The Silver Institute is a key source of information and forecasts about the silver market, influencing investors’ decisions in mining stocks and precious metals investing. Their predictions regarding supply, demand, and potential market disruptions can significantly affect mining stocks’ performance. For instance, if the Silver Institute forecasts an increase in industrial demand, mining stocks may see a surge as companies ramp up production to meet this expected demand.

What are the benefits of adding numismatic silver like the Canadian Maple to a mutual funds portfolio?

A: Adding numismatic silver, like the Canadian Maple, to a mutual funds portfolio can offer benefits of diversification and potential profit. Numismatic coins often carry a premium over their spot price due to their collectible value, rarity, and demand among coin collectors. This can provide an additional layer of investment potential over and above the intrinsic value of the silver itself. Moreover, the diversification into precious metals can help to balance out the risk associated with other assets in the mutual fund.

How does silver investing compare to other options like iShares, buying gold, or crypto?

A: Silver investing, like buying silver bullion bars, offers a tangible asset that has intrinsic value and multiple industrial uses. It’s a stable investment, albeit with less growth potential compared to more volatile options like iShares, gold, or crypto. However, its stability can be beneficial in volatile markets. Gold investing is similar to silver but is often seen as a more premium precious metal. Crypto, on the other hand, can offer higher returns but comes with significant risk due to its volatility. As always, diversification, including a mix of these assets, is key to a balanced investment strategy.

How does the industrial demand for silver, due to its high conductivity, affect its market price and dividend yield?

A: Silver’s high conductivity makes it invaluable for numerous industrial applications, including the production of solar panels and electronics. This industrial demand can directly influence the market price of silver. When demand is high and supply is constrained, the price may increase. This, in turn, can positively impact the dividend yield of silver mining stocks, as companies’ profits may rise with the increasing silver prices. However, it’s important to note that other factors, such as geopolitical events or economic downturns, can also influence the market price and dividend yields.