Silver as an investment

For the physical properties and applications of silver, please see silver.

This article discusses buying silver as an investment.

History

For over 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 a common form of currency.

Silver price

The price of silver is notoriously volatile, as it fluctuates 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 analysed 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 15.5, which meant one ounce of gold would buy 15.5 ounces of silver [1]. The average gold/silver ratio over the 20th century was 47.0 [2].

Year to 31^st December	Silver price US$/oz	Gold price US$/oz	Gold/silver ratio
1910	0.54	20.67	38.28
1920	0.54	20.67	38.28
1930	0.33	20.67	62.67
1940	0.35	34.50	98.57
1950	0.80	40.25	50.31
1960	0.91	36.50	40.11
1970	1.64	37.60	22.93
1980	15.65	641.20	40.97
1990	4.17	423.80	101.63
2000	4.60	272.15	59.16
2005	8.83	513.00	58.10

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 to 17.0 (gold also peaked in 1980, at $850 per ounce) [3]. However a combination of changed trading rules on the New York Mercantile Exchange (COMEX) and the intervention of the Federal Reserve put an end to the game.

In 1997, Warren Buffett purchased 130 million ounces of silver at $4.40 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 [4]. On May 6 2006 Buffett announced to shareholders that his company no longer held any silver.

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 first time by late April of 2006. The monthly average price of silver was $12.61 per oz. during April 2006, and the spot price was around $14.40 per oz. on May 10 2006 [5].

Methods of investing in silver

Bars

A traditional way of investing in silver is by buying bullion bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter of the major banks. Most investors would not recommend storing large quantities of bullion oneself (e.g. in one's home or buried in the garden) but to use a bank or dealer. Other than storing silver in one's own safe deposit box at a bank, silver can be placed in allocated (also known as non-fungible), or unallocated (fungible or pooled) storage with a bank or dealer.

Coins

Buying silver coins is another popular method of physically holding silver, such as 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 than 99.9% pure silver e.g. U.S. pre-1965 half-dollars, dimes and quarters are 90% silver.

Junk silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom 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).

Rounds

Some hard money enthusiatists use .999 fine silver rounds like the Liberty Dollar 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 random assorted batches.

Silver certificates

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 hassles 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.

Silver 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

The iShares Silver Trust (NYSE: SLV), a silver exchange-traded fund (or ETF), was launched in April 2006 by iShares. The Central Fund of Canada (TSX: CEF.NV.A and NYSE: CEF) has 45% of its reserves held in silver with the remainder invested in gold. ETFs represent a quick and easy way for an investor to gain exposure to the silver price, without the hassle of storing physical bars.

ETF Securities are due to launch a silver ETF in 2006, which although not backed by the physical commodity, will track the silver price.

Silver shares

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 shares, some investors prefer spreading their risk by investing in precious metal mining mutual funds.

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. Speculation about the future price of silver and other commodities takes place at COMEX.

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, for example).

As with any asset that appreciates in value, capital gains tax may also apply for individuals.

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