Silver is an interesting investment vehicle because it shares characteristics of precious metals like gold and industrial metals like copper.
The shiny metal has long been used in electronics manufacturing, but part of its current investment thesis is increasing demand from the solar panel industry as the world looks to transition away from fossil fuels and toward more renewable energy production.
Understanding the importance of investing in silver
As a precious metal, silver often tracks gold prices during times of economic uncertainty, as both are considered safe havens. Silver and gold are also thought to hold their value better than the US dollar over the long run, making them hedges against inflation.
With a large portion of its demand coming from industrial uses, silver also has a shorter-term allure as an inflation hedge. When the economy is doing well, or expected to do well, silver’s rising price can act as a cushion against rising costs for other goods that can weigh on the stock market.
But its use as an industrial metal can cut both ways for silver.
“Almost half of global silver demand can be attributed to industrial demand,” said Rohan Reddy, director of research with investment management firm Global X. “This makes silver more sensitive to changes in business activity than gold, which can surprise investors, particularly if the metal unexpectedly underperforms gold during economic slowdowns.”
Different ways to invest in silver
For those who want to get exposure to silver, there are several different ways to invest, including bars and coins, stocks, funds that invest in equities and physical silver, and futures contracts.
1. Investing in silver bars and coins
Silver bars and coins, collectively known as bullion, can be widely purchased from reputable dealers online, pawn shops or individuals.
Investing in the precious metal can be a psychologically satisfying way because you can hold it and look at it. Owning physical metal also means you don’t have the counterparty risk you would with other investments, such as the risk that a stock exchange, fund manager or bank will fail.
Of course, physical silver could be stolen, so you’ll probably want to take out insurance on it. If you want to store it away from your home, you’ll have to pay for that, too. Transportation costs may also be an issue, and you’ll pay a premium to the spot price of silver when you purchase bars or coins.
Because bullion doesn’t pay interest or dividends, the only way you’ll make money off it is if the metal’s price rises, but you’ll have to deduct the aforementioned costs from your overall earnings.
2. IRAs and physical silver
As a way to diversify a retirement portfolio and preserve capital, investors can include silver in a self-directed individual retirement account (IRA) that allows them to include a broad array of alternative assets within their plans, said Jaime Raskulinecz, CEO of the Next Generation Trust Company.
Account holders can include investment-grade bullion in these accounts and the assets are held in depositories that specialize in precious metal storage, she said.
“Those who are not able to afford a lot of physical silver purchased with cash often turn to a silver IRA, in which retirement savings can be rolled over or transferred into an account backed by physical silver,” said Jonathan Rose, CEO with Genesis Gold Group.
3. Investing in silver futures
Another way to invest in silver is through futures contracts. These contracts obligate a holder to buy or sell a specific amount of silver at a certain price at a defined time.
You’ll probably need special permission from your broker to trade futures, but futures trading is often best left to sophisticated investors.
Importantly, futures trading involves using leverage, which can magnify gains and losses.
“Leverage is a double-edged sword and can raise the downside of a trade as well as the upside,” Reddy said. “Small movements in silver spot prices can translate into large price swings on leveraged silver futures. In certain cases, the use of futures can result in losses that even exceed the value of your initial investment.”
Also, you’ll need to understand how to rolling contracts over when they expire if you don’t want to be responsible for taking delivery of or delivering silver, which your brokerage is unlikely to allow anyway.
Rolling over a nearby futures contract that is about to expire means selling it and then buying a further-out contract, which will often be more expensive. That means you’ll lose a certain amount of money on the trade.
4. Investing in ETFs that own silver
Investors who want exposure to silver futures with a fund that trades like a stock can consider an exchange-traded fund (ETF), such as the Invesco DB Precious Metals Fund (DBP).
Another way to invest in silver is through ETFs backed by physical silver instead of futures contracts. With these funds, each share represents a certain amount of silver held in vaults.
The iShares Silver Trust (SLV) is the biggest such fund based on assets under management (AUM), according to ETF Database.
5. Investing in silver stocks
Another way to invest in silver is through stocks of silver mining companies or shares of ETFs that invest in them.
Silver mining companies can outperform silver when its price rises because their margins expand faster than the relatively fixed costs of running a mine. Also, silver miners can often increase production to take advantage of rising silver prices.
Of course, there are risks. Cost inflation can weigh on mining company performance, as can political risk depending on where miners operate. Poor management decisions, accidents and permitting delays or denials are also key risks.
| Pros | Cons |
|---|---|
Has characteristics of precious and industrial metals | Physical silver does not pay interest or dividends |
May act as a safe haven and help hedge against inflation | Can be expensive to transport, store and insure |
Not subject to the same counterparty risks as other assets | Can be stolen or lost |
Easily purchased as bullion or via brokerage accounts | More sensitive to economic activity than gold |
Frequently asked questions (FAQs)
Buying silver mining stocks is the same as buying shares of any other company. It’s as simple as placing orders for silver mining equities or ETFs through your brokerage. But just because it’s simple doesn’t mean you should rush into it. Take the time to do your homework on each company or fund you’re considering.
Company-specific risks, such as the ones listed above, are why many investors choose ETFs that group many silver miners together under one ticker symbol. This also provides instant diversification, at least within this particular sector. ETF Database lists the Global X Silver Miners ETF (SIL) as the largest, based on AUM.
Keep in mind many miners are not yet in production. They’re called “junior miners,” and their shares can make strong gains as they hit milestones in exploration and mine development. But they are also very risky, leading some investors to ETFs like the Amplify Junior Silver Miners ETF (SILJ) as a way to play the junior sector while mitigating the risks.
Silver futures allow people to invest in silver without physically holding the metal, potentially improving liquidity and reducing ownership costs compared with holding physical silver, Reddy said.
Silver mining stocks can be good investments that may appeal to buy-and-hold investors more than futures. Plus, they offer advantages over physical silver you hold yourself rather than in an ETF.
Because silver mining stocks trade on exchanges like other equities, they are more liquid than holding physical silver, Reddy said.
They may also receive favorable long-term capital gains tax treatments compared with physical ownership, which may incur a steeper collectibles tax rate, Reddy said.
