Investing in silver: what are the pros and cons?
In order to have the right information on the topic of investment silver, it is first worth understanding the basic concept itself, namely what is silver and what makes it valuable !?
What is silver?
Silver does not oxidize, so like gold, it is a representative of precious metals. Its excellent electrical conductivity and easy machinability make it particularly valuable to the industry.
As a precious metal, silver has a wide range of uses outside of industrial applications. Both the jewelry industry and technological use place a strong demand for silver, which affects the price of silver. Investment silver accounts for roughly a quarter of total silver demand.
Silver as an investment
As you can read in our post on Investments, there are several variations of the investment portfolio, one of which is precious metals, in our case silver.
Like gold, silver has been used by many cultures for money minting and storing valuables. As long as the US dollar used a gold standard for a long time, the British pound was built on silver.
Although there have been periods when demand for investment silver has declined, over the past 20 years demand for it has risen significantly. The increase in demand was accompanied by an increase in their exchange rate, which resulted in a positive return for those who invested in silver at the time.
Investment silver is used by many along with other precious metals, i.e. gold, platinum and palladium, to protect against inflation. In contrast to gold, on the other hand, there is a much higher industrial demand for silver, so it is more like platinum in this respect.
Factors affecting the price of investment silver
The price of silver varies like many other products. The world market price of silver on the stock exchange is fundamentally affected by the demand for and supply of silver. If supply increases (either actually, either relative to demand), then the price decreases, and if demand increases (whether the market actually picks up more silver, or as production decreases), then the price of silver increases.
Demand for silver
Using investment silver can pay off for you in many places. The price of silver is affected by the demand for it. The more people look for, the higher the price of the precious metal will be.
There has always been and will be a demand for silver jewelry. Demand for jewelry may decline during an economically difficult period, especially for higher priced gold jewelry. People who don’t want to give up buying jewelry even in difficult times can easily switch from gold jewelry to lower priced silver.
In an uncertain period, people are happy to flee their property to a place that represents great value in a small place. Gold is the most popular for this, but silver can serve the same purpose. Thus, in times of geopolitical uncertainty, the demand for silver as a store of value increases, which also affects the price of investment silver.
The development of the industry is also increasing the demand for silver
In a calmer period, there will be greater demand for the industrial use of silver. Industrial use accounts for a significant share of demand for silver, so the rise of these industries (from medicine to photography or even solar panels) is accompanied by an increase in demand for silver and thus in the price of silver.
In a booming economy, although there is less demand for the role of storing valuables, in a higher inflationary environment due to booming industry, investment silver is still attracting attention. With this, investors are no longer protecting their money from a geopolitical uncertainty, but from inflation.
The price of silver can also be affected from the supply side.
Silver is not only mined in silver mines. Lead, zinc, and gold mines also mine silver as a kind of by-product. If the demand for these metals decreases, so will their mining, and with it the amount of silver produced as a by-product. And a decrease in volume brings with it a rise in prices.
If a central bank raises interest rates, it means that loans, and thus investments will become more expensive. This will allow the central bank to cool the economy slightly. With the rise in interest rates, fully safe reserves, even available through bank deposits are popular. After all, why would you take any amount of risk when you can achieve the same as fixed. Thus, the increase in interest rates by central banks also has a negative effect on the price of precious metals.
Performance of alternative investments
If the returns of other investment instruments (e.g., mutual funds, stocks, bonds) are expected to significantly exceed the performance of silver, it is natural that money will flow more into them. If the bond market comes to a standstill or shows negative returns, the demand for investment silver will pick up, which will also push the price of silver higher.
Why investing in silver is a good choice?
Silver as an investment allows you not to store your wealth in money, so you are protected from inflation as money spoilage.
Extensive usability places a significant demand on silver, so you can expect an exchange rate rise as well.
Silver is good for you to diversify your investment, so your performance is not dependent on the performance of a single direction. Many use gold to diversify and protect against inflation. The figure below shows a comparison of silver and gold.
In the image above, the blue line indicates the change in the price of gold and yellow the change in the price of silver. As you can see, lower priced silver compared to gold also allows for a lower entry point. This way you can buy more silver for the same amount of money. The volatility of silver is higher than that of gold. Although this involves risk, it has higher return prospects if properly managed. More silver bought at a lower price can come back to you multiple times accordingly.
The disadvantage of investing in silver
In general, silver, along with other precious metals, is an investment based on faith. You invest money in precious metals because you think that someday someone will give you more for it than you bought for it.
Silver produces nothing, not like stocks and bonds. You get neither interest nor dividends because you have silver. Thus, only the increase in the exchange rate will benefit you.
As for the price of silver, you can observe that if the demand for stocks and bonds is high, then the investment in silver is less frequent, so you cannot expect a significant return during these periods. Demand for silver will pick up when bond yields fall or even become negative.
Comparison of silver investments
When it comes to precious metals, it is the first thought of many people and at the same time the most obvious option is to invest in silver in its physical form. This, in turn, is one of the least cost-effective ways to invest in silver.
The reasons for this are:
- You can’t choose the exact weight for silver coins and bars. The weight of silver is not measured in grams but in ounces (1 ounce 31.1 grams) and you will pay for the actual silver content of the selected physical silver.
- You have to store silver as a precious metal somewhere. Unless you live in some military bunker, it is not advisable to store larger amounts of silver back home. Places designed for this may keep your silver 100% safe under favorable conditions, but you still have to pay for it.
- Sometimes you have to move the silver. It may not be frequent, only when you take it in place after a purchase or when you just sell it after a while. You have to make sure it’s safe. While a silver bracelet may not seem heavy, silver is 11x heavier than water.
- You can typically buy or sell physical silver through intermediaries. Since the tomb of Christ was not kept for free either, and intermediaries also have to make a living from something, you can expect the merchant to charge a 3-5% fee for his work.
By using CFDs, you can even profit from exchange rate falls or leverage. That is, you can win more with less money.
This, in turn, can backfire. As much as you can gain with leverage, you can obviously lose just as much with it. Also, if you count on that the price of silver will fall and still rise, you will lose because of the rise.
This is why this tool should be used wisely. CFD trading is less regulated than other forms of trading, so it can be an added risk for you.
Shares of companies dealing in silver
If you don’t want to deal in physical silver, but still want to profit from silver, you can do so by investing in the papers of silver mining companies.
Then it is not specifically just the sale and purchase of silver that means profit to you. You can also receive dividends after the shares, and the performance of companies depends not only on their own size or mining opportunities, but also on their money management. Whichever is smaller but uses its resources more efficiently can achieve greater results for you.
Of course, you can also invest in companies dealing with silver one by one, but then it is advisable to analyze all the companies that come into your view, which one, when and how much. Using the silver ETF, the silver mining companies are gathered for you and you get it in a package.
Then you have the opportunity to choose from companies selected on the basis of geographical location, size of capital and other characteristics, so your risk is reduced and diversification is realized.
Another type of silver ETF is when physical silver is traded. Then silver bars are held and shares are issued for them. These shares will be held together by the ETF. This is best for you to buy physical silver, with the difference that it is more cost effective. You do not have to pay to store and transport the silver and pay the agent.
Silver has long been used by humanity to store value. Its use as money dates back a long time. Today, silver, as a representative of precious metals, is a means of diversifying your financial portfolio. You have the opportunity to use it to protect your money from inflation, and you can also enjoy the gains from the exchange rate rise due to the demand for significant industrial use.
- How much do you personally believe in investing in any form of silver?
- If you decide to invest in silver, which form would you prefer?
- How long do you think it is worth investing in silver?
I am happy to read your questions and opinions. You can Contact us in person here.