Many investors wonder how to invest in silver in the most appropriate way since silver has traditionally held up well to inflation and has contributed to the offsetting of investors’ portfolios. When everything else goes wrong, silver becomes one of the best investment alternatives, just like gold. In today’s article, we will analyze the different options with which we can invest in silver since the possibilities to invest in this unique precious metal are very wide.
Silver As A Refuge
It has usually been associated with silver as an active refuge, but it is much more than that, it is a natural element that has a multitude of uses in different fields, ranging from industry to luxury. Historically, gold has played a role closely linked to the monetary field. This historical fact is due to its properties, of which the five most important are the following: its scarcity, its durability or resistance, its divisibility, its homogeneity, and its difficult falsification.
Differences Between Gold and Silver
The main difference between gold and silver for investors is that silver has a much more industrial use than gold, therefore silver in relation to gold has to be more valued as a raw material. We do not want to claim that silver is a commodity per se, but in relation to gold, it is, on the other hand, if we compare it with steel, this valuation would change.
Because of this industrial attribute, there have been large discrepancies between the value of silver and gold. Gold has covered inflation, is an international currency, is relatively not very volatile, and is the stock of value par excellence. Silver however has great industrial use, has not covered inflation, and is quite more volatile than gold. For these qualities, it seems that having gold in the portfolio is more interesting than silver, but this also has good qualities, and depending on the period, silver has been a better investment than gold, as has happened recently. From the minimums of the pandemic to the maximums of the post-quarantine rally, silver was revalorized by more than 100%, while gold did so by around 30%.
Risks of Silver Trading
The risks of investing in silver are not as limited as those of gold, but arguably, the main risk of investing in silver is mainly opportunity cost, because, if we invest in it is waiting for a recession and finally comes an expansive cycle, while the entire stock market goes up your silver investment will fall or fall flat. Another risk is deflationary pressure, since if a crisis comes, where silver is supposed to act better but is linked to a very strong deflationary trend, silver might not behave at all well, because this makes it better with inflationary tensions. Finally, there is a certain cyclical risk, since silver, when used industrially, can have a cyclical component depending on the economic cycle or industry in particular where silver is needed.
How To Invest
Undoubtedly, investment in physical gold is traditionally the most common form of investment and widespread option. It consists of the physical acquisition of a silver ingot, silver jewelry, silver coins, or any element that contains silver mostly in its composition. This option has the advantage that you possess silver physically. On the other hand, it has the disadvantage that you have to bear some storage costs because, being such a valuable product, most investors do not keep it at home.
In this sense, there are different companies that are dedicated to the storage of any gold product, and that offers you the possibility of buying gold physically but not having to store it, I mean, you own the amount of silver you buy and it will be 100% insured. To emphasize that the acquisition of physical silver is more related to the idea of acquiring the good more like a luxury good than as an investment asset.
Investing in silver through the stock exchange is a way of owning silver by means of a title that accredits a right over the silver and not by means of its physical possession. This way of acquiring, which as we will see below has many variants, has a more investment approach. As in most situations, it has pros and cons in each of its different branches.
Silver ETFs
Silver ETFs are traded funds that try to replicate the behavior of silver. Although the fund must maintain a legal obligation to have all derivative contracts issued backed by silver, the ETF holder owns that derivative contract (ETF) which replicates the silver price, and not a proportion of the silver reserve. In this way, the investor, who owns the derivative, is exposed to the yields of the precious metal.
The advantages and disadvantages of silver ETFs are a projection of the advantages and disadvantages of the overall investment in ETFs. Investing in a silver ETF and not in physics has the advantage that it requires a lower cost, both for the execution of the investment and storage. In addition, as they are listed in the market as any stock they have the advantage of having greater liquidity compared to investment funds, giving the possibility to liquidate the position at any time in the market.
On the other hand, it has the disadvantages that the investor did not pose the silver physically, but a title (right) on some silver reserves. There is the possibility that the ETF does not faithfully replicate the price of silver, depending in part on how the ETF is composed. The ETFs are subject to commissions in their purchase, it will be necessary to take into account what are the commissions that can charge us for the operation and what impact it will have on the replication of the silver price.
Investment Funds
These are funds that develop their entire investment strategy around silver, gold, or other precious metals, either by acquiring companies that develop activity within the silver sector, either by own acquisition of silver in any of its tradable forms or by acquisition of ETFs silver. In addition, they are also often exposed to other precious metals, which increases the diversification of the fund. In addition, as you comment later on it is very complicated to find companies that have only exposure to silver and not to more precious metals.
The advantages of investing in silver through this form are the professionalized management of the fund, focusing on generating value for the shareholder. At the same time, it gives the possibility to invest in shares or other funds where it is not possible individually.
The disadvantages are the costs associated with the management of the fund, greater than in the ETFs, which can weigh the profitability.
Listed Silver Companies
Investing in shares of listed silver companies is the most direct way to invest in silver. We will differentiate two main types of businesses that operate in the sector with different business models: pure mining and royalty companies. In either option, we are exposed to greater risk than in the rest of the alternatives, which implies that we can enjoy both higher profits and higher losses. Within these two, the business model of royalties can be more interesting and less risky.
Seeing all the conflicts that are currently developing, the lower interest rates, the US elections, and the real risk of a slowdown, or even a recession triggered by the coronavirus, It seems not unreasonable to think that people will continue to support their investment strategy in buying gold with the aim of reducing risk and further diversifying their portfolio. Therefore, we could be looking at a good time in the cycle to buy silver.