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Precious metals have been in high demand since the onset of the COVID-19 pandemic as investors continue to worry that the ultra-accommodative policies adopted by central banks around the world could result in a severe erosion in the purchasing power of fiat currencies because of higher inflation.
In the United States alone, the Federal Reserve printed around 24% of the country’s total money stock in 2020 as part of its efforts to stabilize the financial markets during the pandemic-prompted turmoil.
Meanwhile, the first few months of 2021 have shown signs that inflation is accelerating in the country, with readings already surpassing analysts’ estimates to the upside while consumers’ expectations point to a sustained increase in prices in the following 12 months.
In this context, silver — along with other precious metals — has emerged as a potential hedge against the ongoing debasement of fiat currencies, with prices already surging 6.5% this year after posting a 48% annual gain in 2020.
If you believe that the world is heading for a period of high inflation, learn how you can invest in silver to diversify and hedge your net-worth against a loss in the dollar’s purchasing power.
How to Invest in Silver
Silver is a commodity that trades in multiple forms. You can either buy bullion, jewelry, or pure silver items or you can also turn to the financial markets to invest in vehicles that track the price of the precious metal.
In the following section, we will show you all the alternatives you currently have to invest in silver.
Silver ETFs & Mutual Funds
Exchange-traded funds (ETFs) and mutual funds are among the most popular investment vehicles for incorporating silver into your portfolio. These instruments track the price of the precious metal by buying bullion directly or derivatives such as silver futures.
Although there are not that many pure-play silver ETFs as there are gold ETFs, there is still a decent selection of funds that offer exposure to the precious metal without incurring high commissions. These are the two largest:
- iShares Silver Trust (SLV) — AUM: $15.9 billion — Managed by: BlackRock
- Aberdeen Standard Physical Silver Shares ETF (SIVR) — AUM: $1.1 billion — Managed by: Standard Life Aberdeen
We have not found a silver-only mutual fund, but some financial services firms do offer a selection of precious metal funds like the Invesco DB Precious Metals Funds.
These commodity-specific investment vehicles typically charge higher expense ratios compared to index funds, mostly due to the costs associated with storing and protecting physical bullion.
For example, the Aberdeen Standard Physical Silver Shares ETF (SIVR) charges a 0.5% annual fee while the Sprott Physical Silver Trust (PSLV) charges a higher 0.62% annual expense ratio.
There are many advantages to buying these vehicles instead of bullion as they reduce the cost and risks of storing the precious metal while there is also a liquidity factor to consider as these ETFs can be quickly and easily bought and sold via traditional exchanges like E*TRADE, Firstrade, and TradeStation.
Silver ETNs
Exchange-traded notes (ETN) are considered debt instruments that can be easily exchanged as if they were a stock. However, they work differently than ETFs and that is why we are devoting a separate section to them.
An ETN is a contract between two parties that is priced based on the fluctuation of the underlying asset — in this case, silver. If the price of silver goes up so does the value of the contract and vice versa.
ETNs have a fixed maturity date. Once that maturity date is reached, the issuer will settle the contract by returning its final value to the holder. If the price of silver went down during the period, the holder will experience a loss while if the price has gone up, the operation will result in a profit for the holder.
It is important to note that issuers don’t necessarily have to hold physical silver to issue ETNs, which means that solvency and credit risks must be considered before entering an agreement of this nature with an institution.
On the other hand, the fees associated with trading and holding ETNs are typically lower compared to those resulting from buying physical bullion.
That said, the unique structure and risks associated with ETNs make them an unappealing choice for beginner investors who may not fully understand the intricacies of these contracts.
✎ Editor’s Note
ETNs are more complex than your regular silver ETFs since they don’t physically hold the asset in trust. The price of an ETN tracks a commodity index.
Silver Futures & Options
Futures and options are derivative contracts, which means that their value is derived from the price of the underlying asset they track — in this case, the price of silver.
Futures contracts are offered by institutions like the Chicago Mercantile Exchange — also known as the CME Group — and they typically expire every month. Once the expiration day is reached, the contract holder will be entitled to receive a total of 5,000 troy ounces of the precious metal and the total amount to be paid would result in the quoted price at the moment the contract was settled multiplied by 5,000.
Front-month contracts — the ones that will expire the sooner — typically trade near the commodity’s spot price. On the other hand, contracts that expire on future dates often have a different price depending on the market’s expectations of where silver prices might be a month or a year from now.
One of the benefits of investing in silver by buying futures contracts is that you will be entitled to receive bullion once the contract expires. Keep in mind that 100 troy ounces are around 155.52 kilograms of silver, which is, in most cases, too much silver to be handled by a retail investor.
For this reason, futures are often used for short-term trades rather than as a vehicle to maintain long-term exposure to the precious metal. That said, depending on your expectations about how silver prices will behave in the future you could buy longer-dated futures contracts and sell them before they expire to avoid being assigned with such a huge amount of silver.
Meanwhile, even though options are also derivative instruments that fluctuate based on the price of silver, they work differently from futures as options give the holder the right, not the obligation, to buy (call options) or sell (put options) the precious metal at a certain price in the future.
Options could expire worthless if the price of the underlying asset moves below the strike price (call option) or above the strike price (put option). That said, options are cheaper to buy as the holder pays a small premium for every 100 contracts they buy instead of having to pay the full price of the contract.
Same as with futures, options are more convenient as a short-term speculative vehicle than as a long-term investment vehicle due to their inherent volatility and the risk of losing your entire premium if the price of the underlying asset falls below (call) or above (put) the strike price.
Finally, there’s a particular risk to take into account when investing in futures and that is rollover risk. Since futures contracts expire every month, this means that investors can only hold the contract until then. Therefore, if they would like to continue to hold silver, they would be forced to liquidate the front-month contract to buy next month’s contract.
Costs are usually incurred when this is done while there is also the risk that the price of next month’s contract is higher than the price of the front-month contract — which would result in a rollover expense for the investor.
Moreover, assignment risks should also be taken into account when investing in silver via futures contracts. This means that failing to rollover your contract before it expires could result in the assignment of the corresponding 5,000 troy ounces you are entitled to, meaning that you’ll have to take delivery and manage the transportation, storage, and protection costs associated with holding bullion.
Silver Mining Stocks
Another way to invest in silver indirectly is to buy stocks of companies that mine or trade the precious metal.
One way to get exposure to silver mining stocks is to buy individual issues such as First Majestic Silver (AG), a Canada-based mining company whose revenues mostly come from the extraction of the metal in Mexico. Another option would be to buy shares of Silvercorp Metals Inc. (SVM), also a Canada-based silver miner.
On the other hand, you could buy an ETF that invests in silver mining stocks such as the Global X Silver Miners ETF (SIL) — the largest ETF covering this segment of the industry — or the ETFMG Prime Junior Silver Miners ETF (SILJ).
Global X’s ETF first traded in April 2010 and since then, the weekly correlation between the performance of the commodity and that of the ETF has stood above 0.5 except for two instances, one of them being the pandemic-prompted March 2020 market crash.
Although investing in silver mining stocks is not necessarily the same or will not deliver the exact returns as buying silver futures or bullion, other factors such as dividend distributions should be considered as a benefit of opting for these instruments rather than buying and holding silver directly through some of the vehicles mentioned above.
Silver Bullion
A silver bullion is a big physical piece of the precious metal that has a standard weight of 6.86 pounds and is commonly 99.9% pure. Silver bars are produced and sold by top mints around the world including those in the United States, Austria, and New Zealand.
Although holding silver bullion was a popular choice among investors in previous decades, the cost and risks of storing these physical assets make it a costly choice for most retail investors. Based on current prices, the price of a silver bar is around $3,100.
As a reference, The Perth Mint charges different rates for storing silver ranging from 1.9% per year to zero percent if the holdings are purchased through their Certificate Program.
On the other hand, Bullion Vault charges 0.04% per month for storing silver in their top professional vaults with a minimum of $8 per month. Silver Gold Bull is yet another gold and silver dealer offering an easy way to buy and store precious metals.
It is also important to note that investors should be careful in buying silver bullion only from regulated dealers and mints. Buying bullion in the secondary market from an unauthorized party presents the risk of purchasing counterfeits.
✎ Editor’s Note
The spot price of silver is the basis for determining pricing when you want to buy silver bullion.
Silver Streaming Companies
Precious metal streaming companies provide a non-dilutive source of funding to mining businesses while receiving a royalty or a fixed percentage of the miner’s output in return.
This is a fairly innovative option to invest in silver as the performance of the investment should fluctuate similarly to the price of the metal. However, evidence suggests that streaming companies have outperformed miners and even the underlying precious metal itself because of their reduced operating expenses.
Some of these companies include Franco-Nevada (FNV), Wheaton Precious Metals (WPM), and Royal Gold (RGLD). Their shares can be bought by using an online brokerage firm.
Benefits of Investing in Silver
- Tangible asset that can be easily exchanged by fiat currency.
- Multiple options to invest in the precious metal that reduce storing costs and risks.
- Silver is cheaper than gold.
- The price of silver fluctuates based on multiple variables while the market is highly liquid. This reduces the risk of price manipulation.
- No specialized knowledge is necessarily required to buy and sell silver.
- Physical silver bullion is an ideal vehicle to transfer wealth.
Downsides of Investing in Silver
- Storing physical silver can be risky and costly.
- Establishing ownership is impossible if a silver bar is melted.
- Holding silver directly does not generate any kind of recurring income.
FAQ About How to Invest in Silver
We’ve found some of the most frequently asked questions about how to invest in silver. Here are our answers.
Why Should I Invest in Silver?
Silver is not solely used as a financial asset. Since the metal is highly conductive, it has multiple industrial uses as well. This guarantees that even if demand for it as an investment vehicle drops, the price of silver should still be supported by its industrial demand in a scenario of economic stability.
Additionally, silver is cheaper than gold, which makes it a good choice for investors who have a limited account balance. Finally, the price of silver is more volatile than that of gold and this opens up the opportunity for obtaining some short-term profits in case the precious metal starts to experience above-average demand.
What Is the Best Way to Invest in Silver?
Exchange-traded funds (ETFs) have emerged as the best option for investing in silver due to their low annual expense ratios.
Take for example the 0.5% annual fee charged by Aberdeen’s Silver ETF. That fee is nearly the same as buying and holding silver with Bullion Vault but it eliminates the transaction fees involved as most brokerage firms nowadays don’t charge any commissions or fees for trading US-listed ETFs.
Is Silver a Good Investment?
Whether an instrument is a good investment or not depends on several factors including the entry price, future performance of the asset, transaction fees involved in the operation, and market conditions.
You should conduct due diligence to determine if, at the moment, silver can be considered a good investment based on the demand for the precious metal from both the financial sector and industries. Additionally, supply-side variables should also be considered such as the state of the mining industry, the number of newly found mines, etc.
What’s The Difference Between Investing in Gold vs. Investing in Silver?
If we compare the two precious metals, investing in silver is commonly the most volatile option of the two but also the cheapest when it comes to buying bullion.
On the other hand, storing silver is often more difficult than gold as the same money will get you more silver bars. This would result in more silver to store compared to the reduced amount of gold you would buy with the same money.
Finally, statistically, gold has served as a better hedge against inflation and economic hardship than silver due to its long-standing reputation as the ultimate store of value. In contrast, silver prices could fluctuate sharply if industrial demand declines or technological shifts lead to lower usage.
Final Thoughts
The list above has summarized the most popular options for investing in silver. Among them, investing in the precious metal by using exchange-traded funds (ETFs) is perhaps the most convenient of all but, depending on your unique situation and preferences, you may opt for other alternatives like buying bullion or investing in silver mining stocks to get exposure to the precious metal.
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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.
