Silver as an investment

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Silver, like other precious metals, may be used as an investment. For more than 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 legal tender in all developed countries including the United States, although some countries mint bullion and collector coins like the American Silver Eagle with nominal face values.[1] In 2009, the main demand for silver was for industrial applications (40%), jewellery, bullion coins and exchange-traded products.[2][3] In 2011, the global silver reserves amounted to 530,000 tonnes.[4]

Millions of Canadian Silver Maple Leaf coins and American Silver Eagle are purchased as investments each year. The Silver Maple Leaf is legal tender at $5 per ounce and there are many other silver coins with higher legal tender values, including $20 Canadian silver coins. Silver is legal tender in Utah, and can be used to pay all debts.[5]

Price[edit]

Silver price history in 1960-2011

Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand fluctuations between industrial and store of value uses. At times this can cause wide ranging valuations in the market, creating volatility.[6]

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The crustal ratio of silver to gold is 17.5:1.[7] The gold/silver price ratio is often analyzed by traders, investors and buyers.[8] In Roman times, the price ratio was set at 12 or 12.5 to 1.[9] In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1,[10] which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803.[11] The average gold/silver price ratio during the 20th century, however, was 47:1.[12]

Year Silver price (yearly cum. avg.[13])
US$/ozt
Gold price (yearly cum. avg.[14])
US$/ozt
Gold/silver
ratio
World Silver Reserves (in tons) [15]
1840 1.29 20 15.5 N/A
1900 0.64 20 31.9 N/A
1920 0.65 20 31.6 N/A
1940 0.34 33 97.3 N/A
1960 0.91 35 38.6 N/A
1970 1.63 35 22.0 N/A
1980 16.39 612 37.4 N/A
1990 4.06 383 94.3 N/A
2000 4.95 279 56.4 420,000
2005 7.31 444 60.8 570,000
2009 14.67 972 66.3 400,000
2010 20.19 1,225 60.7 510,000
2011 35.12 1,572 44.7 530,000
2012 31.15 1,669 53.6 540,000
2013 (as of Dec 2) 24.13 1,424 59.0 not available

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per ozt. for the first time by late April 2006. The monthly average price of silver was $12.61 per troy ounce during April 2006, and the spot price was around $15.78 per troy ounce on November 6, 2007. As of March 2008, it hovered around $20 per troy ounce.[16] However, the price of silver plummeted 58% in October 2008, along with other metals and commodities, due to the effects of the credit crunch.[17] By April 2011, silver had rebounded to reach a 31-year high hitting $49.21 per ounce on April 29, 2011 due to economic concerns about inflation and uncertainty regarding bailouts in the Eurozone.[18] From the year 1840 to 2012 silver has its life time high-price in 1980 on Silver Thursday.

Influencing factors[edit]

Large traders or investors[edit]

The y axis represents the price of silver and the x axis represents the year. The large spike in 1980 was a result of the Hunt brothers' failure to corner the market and Silver Thursday.

The silver market is much smaller in value than the gold market. The London silver bullion market turns over 18 times less money than gold.[19] With physical demand estimated at only $15.2 billion per year, it is possible for a large trader or investor to influence the silver price either positively or negatively. For example:

From 1973 the Hunt brothers began cornering the market in silver, helping to cause a spike in January 1980 of the London Silver Fix to $49.45 per troy ounce, silver futures to reach an intraday all-time high of $50.35 per troy ounce and a reduction of the gold/silver ratio down to 1:17.0 (gold also peaked the same day in 1980, at $850 per troy ounce).[20][21] In the last nine months of 1979, the brothers were estimated to be holding over 100 million troy ounces of silver and several large silver futures contracts.[22] However, a combination of changed trading rules on the New York Mercantile Exchange (NYMEX) and the intervention of the Federal Reserve put an end to the game. By 1982 the London Silver Fix had collapsed by 90% to $4.90 per troy ounce.[23]

In 1997, Warren Buffett purchased 130 million troy ounces (4,000 metric tons) of silver at approximately $4.50 per troy ounce (total value $585 million). On May 6, 2006, Buffett announced to shareholders that his company no longer held any silver.

In April 2006, iShares launched a silver exchange-traded fund, called the iShares Silver Trust (NYSE ArcaSLV), which as of November 2010 held 344 million troy ounces of silver as reserves.[24]

A big driver for silver sales in 2012 was Morgan Stanley and their short position holdings. This has influenced the silver market, along with an apparent shortage of above ground silver available for investment. As silver continues to boom for industrial uses, less of the metal is available for physical bullion for investment. That, coupled with paper investment uncertainty, has driven the market prices wildly.

Short selling[edit]

In April 2007, Commitments of Traders Report revealed that four or fewer traders held 90% of all short silver futures contracts totalling 245 million troy ounces, which is equivalent to 140 days of production. According to Ted Butler, one of these banks with large silver shorts, JPMorgan Chase, is also the custodian of the SLV silver exchange-traded fund (ETF). Some silver analysts have pointed to a potential conflict of interest, as close scrutiny of Comex documents reveals that ETF shares may be used to "cover" Comex physical metal deliveries. This led analysts to speculate that some stores of silver have multiple claims upon them. On September 25, 2008 the Commodity Futures Trading Commission (CFTC) relented and probed the silver market after persistent complaints of foul play.[25]

In April 2010, Andrew Maguire, a former Goldman Sachs trader, went public with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets, prompting a number of lawsuits.[26] In response to allegations of market manipulation from silver investors such as Max Keiser, Blythe Masters, Head of Global Commodities for JP Morgan, told CNBC in April 2012 "often when customers have metal stored in their facility, they hedge it through JP Morgan on a forward basis who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren’t aware of the underlying client position that we’re hedging then it would suggest inaccurately that we are running a large directional position."[27]

Industrial, commercial, and consumer demand[edit]

The traditional use of silver in photographic development has been dropping since 2000 due to the decline of film photography.[2] However, silver is also used in electrical appliances (silver has the lowest resistivity of industrial metals), photovoltaics (one of the highest reflectors of light), RoHS compliant solder, clothing and medical uses (silver has antibacterial properties). Other new applications for silver include RFID tags, wood preservatives, water purification and food hygiene.[28] The Silver Institute have seen a noticeable increase in silver-based biocide products coming onto the market, as they explain:

Currently we’re seeing a surge of applications for silver-based biocides in all areas: industrial, commercial and consumer. New products are being introduced almost daily. Established companies are incorporating silver based products in current lines - clothing, refrigerators, mobile phones, computers, washing machines, vacuum cleaners, keyboards, countertops, furniture handles and more. The newest trend is the use of nano-silver particles to deliver silver ions.

[29]

Data from 2010 reveals that a majority of silver is being used for industry (487.4 million ounces), jewelry (167.0 million ounces), and investments (101.3 million ounces).[30] Approximately 500 ounces of silver are used in every Tomahawk (missile).

The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long-term rise in industrial and jewelry usage.

Hedge against financial stress[edit]

Silver, like all precious metals, may be used as a hedge against inflation, deflation or devaluation.[31] As Joe Foster, portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010:

The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become.

[32]

Investment vehicles[edit]

Bars[edit]

A 5 kg silver bar

A traditional way of investing in silver is by buying actual bullion bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter at major banks.

The flat, rectangular shape of silver bars makes them ideal for storage in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer. Silver is traded in the spot market with the code "XAG". When settled in United States Dollars, the code is "XAGUSD".

Various sizes of silver bars:

  • 1000 oz troy bars – These bars, 999 fine, weigh about 68.6 pounds avoirdupois (31 kg) and vary about 10% as to weight, as bars range from 900 ozt to about 1,100 ozt (28 to 34 kg). These are COMEX and LBMA good delivery bars.
  • 100 oz troy bars – These bars weigh 6.86 pounds (3.11 kg).
  • Odd weight retail bars – These bars cost less and generally have a wider spread, due to the extra work it takes to calculate their value and the extra risk due to the lack of a good brand name.
  • 1 kilogram bars (32.15 oz troy)
  • 10 oz troy bars and 1 oz troy bars (311 and 31.1 g)

Coins and rounds[edit]

American Silver Eagle bullion proof coin

Silver coins include the one ounce 99.99% pure Canadian Silver Maple Leaf and the one ounce 99.93% pure American Silver Eagle. Coins may be minted as either fine silver or junk silver, the latter being older coins made of 90% silver. U.S. coins 1964 and older (half dollars, dimes, and quarters) are generally accepted to weigh 24.71 grams of silver per dollar of face value, which at their nominal silver content of 90%, translates to 22.239 g of silver per dollar. All U.S. dimes, quarters, halves and 1 dollar pieces contained 90% silver since their introduction up until 1964 when they were discontinued. The combined mintage of these coins by weight exceeds by far the mintages of all other silver investment coins.

All 1965-1970 and one half of the 1975-1976 Bicentennial San Francisco proof and mint set Kennedy half dollars are "clad" in a silver alloy and contain just under one half of the silver in the pre-1965 issues.

Junk-silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom and Canada 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). Canada produced silver coins with 80% silver content from 1920 to 1967.

Other hard money enthusiasts use .999 fine silver rounds as a store of value. A cross between bars and coins, silver rounds are produced by a huge array of mints, generally contain a troy 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 assorted batches.

Exchange-traded products[edit]

Silver exchange-traded products represent a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars. Silver ETPs include:

  • iShares Silver Trust (NYSE ArcaSLV) launched by iShares is the largest silver ETF on the market with over 340 million troy ounces of silver in storage.[33]
  • ETFS Physical Silver (LSEPHAG) and ETFS Silver Trust (NYSE ArcaSIVR) launched by ETF Securities.
  • Sprott Physical Silver Trust (NYSE ArcaPSLV, TSXPHS.U) is a closed-end fund created by Sprott Asset Management. The initial public offering was completed on November 3, 2010.[34]

Certificates[edit]

A silver certificate of ownership can be held by investors instead of storing the actual silver bullion. Silver certificates allow investors to buy and sell the security without the difficulties 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.

The U.S. dollar has been issued as silver certificates in the past, each one represented one silver dollar payable to the bearer on demand. The notes were issued in denominations of $10, $5, and $1; however, since 1968, they can no longer be redeemed for physical silver; nor for any other form of lawful money, except Federal Reserve Notes (or their coin-equivalents) - on a dollar for dollar basis.

Accounts[edit]

Most Swiss banks offer silver accounts where silver can be instantly bought or sold just like any foreign currency.[citation needed] 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. Digital gold currency providers and internet bullion exchanges, such as BullionVault or GoldMoney, offer silver as an alternative to gold. At least some of these companies do not allow investors to redeem their investment in actual silver.[35]

Derivatives, CFDs and spread betting[edit]

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. In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 5 kg silver futures.

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, provide contract for difference (CFD) or spread bets on the price of silver.

Mining companies[edit]

Main article: Silver mining

These do not represent silver at all, but rather are shares in silver mining companies. 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 companies, some investors prefer spreading their risk by investing in precious metal mining mutual funds.

Taxation[edit]

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 recognized 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 20% in the United Kingdom and 19% for bars and 7% for bullion products with face value, e.g. The US Silver Eagle and the Canadian Maple Leaf, in Germany). Norwegian companies can legally deliver free of VAT to the rest of Europe within certain annual limits or can arrange for local pickup.

Other taxes such as capital gains tax may apply for individuals depending on country of residence (tax status) and whether the asset is sold at increased nominal value.

See also[edit]

References[edit]

  1. ^ "American Silver Eagle". The United States Mint. Archived from the original on December 2, 2013. Retrieved November 24, 2013. 
  2. ^ a b "Supply & Demand". The Silver Institute. Archived from the original on December 4, 2011. Retrieved September 29, 2010. 
  3. ^ "2000pres". The Silver Institute. Archived from the original on November 29, 2011. Retrieved September 29, 2010. 
  4. ^ Silberreserven und Preise Retrieved 28. December 2012. Archived December 2, 2013 at the Wayback Machine
  5. ^ Utah Law Makes Coins Worth Their Weight in Gold (or Silver), New York Times, May 29, 2011
  6. ^ "The Case for Silver | Gold News". Goldnews.bullionvault.com. March 25, 2010. Archived from the original on May 12, 2013. Retrieved September 29, 2010. 
  7. ^ Stanley W. Ivosevic (1984). Gold and Silver Handbook on Geology, Exploration, Development, Economics of Large Tonnage, Low Grade Deposits. University of California. p. 160. ISBN 0961135239. 
  8. ^ "Is Silver Nailed to Gold? | Gold News". Goldnews.bullionvault.com. September 20, 2010. Archived from the original on December 2, 2013. Retrieved September 29, 2010. 
  9. ^ Morteani, Giulio; Jeremy Peter Northover (1994). Prehistoric Gold in Europe: Mines, Metallurgy and Manufacture. New York: Springer-Verlag. p. 37. ISBN 978-0-7923-3255-8. 
  10. ^ http://www.constitution.org/uslaw/coinage1792.txt Archived October 29, 2013 at the Wayback Machine
  11. ^ "The ratio gold and silver from 1800 1900". Dani2989.com. Archived from the original on September 6, 2013. Retrieved September 29, 2010. 
  12. ^ "Study of the report enters the ratio production and price since 1900 of the gold and the silver". Dani2989.com. Archived from the original on September 6, 2013. Retrieved September 29, 2010. 
  13. ^ "London Fix Historical Silver". Archived from the original on March 14, 2014. 
  14. ^ "London Fix Historical Gold". Archived from the original on August 21, 2006. 
  15. ^ "Silver Statistics and Information". USGS. Archived from the original on February 1, 2010. 
  16. ^ "24-hour Spot Chart - Silver". Kitco.com. Archived from the original on November 17, 2006. Retrieved September 29, 2010. 
  17. ^ "Mineweb.com - The world's premier mining and mining investment website Where are the silver bulls? - SILVER NEWS". Mineweb. Archived from the original on April 23, 2014. Retrieved September 29, 2010. 
  18. ^ "Wall Street Journal - PRECIOUS METALS: Economic, Political Worry Fuel Gold, Silver Rally". Wall Street Journal. April 8, 2011. Archived from the original on June 21, 2011. Retrieved April 10, 2011. 
  19. ^ BullionVault.com The Case for Silver - 25th March 2010 Archived May 12, 2013 at the Wayback Machine
  20. ^ http://www.silverinstitute.org/hist_priceuk.php Archived November 3, 2011 at the Wayback Machine
  21. ^ Nguyen, Pham-Duy; Larkin, Nicholas (September 24, 2010). "Silver Futures Jump to 30-Year High: Gold Is Steady After Topping ,300". Bloomberg. Archived from the original on February 9, 2014. 
  22. ^ H.L. Hunt and the Circle K Cowboys Archived May 10, 2012 at the Wayback Machine
  23. ^ http://www.silverfixing.com/timeline.pdf
  24. ^ iShares Silver Trust Archived February 9, 2014 at the Wayback Machine
  25. ^ Cui, Carolyn (September 25, 2008). "CFTC Relents and Probes Silver Market". The Wall Street Journal. Archived from the original on November 8, 2012. 
  26. ^ Michael Gray, "Ex-Goldman trader blows whistle on silver and gold manipulation by JPMorgan, HSBC" New York Post (April 11, 2010). Retrieved May 5, 2011 Archived October 23, 2012 at the Wayback Machine
  27. ^ Are Market Events A Cover For Silver Manipulation?
  28. ^ http://www.lbma.org.uk/assets/alc57_prospects_silver_supply.pdf
  29. ^ "Medical Applications". The Silver Institute. Archived from the original on November 22, 2011. Retrieved September 29, 2010. 
  30. ^ Silver Essentials | The Silver Institute Archived April 3, 2014 at the Wayback Machine
  31. ^ "History of Silver as an Investment". Cornerstone Asset Metals. Archived from the original on March 16, 2014. Retrieved October 7, 2011. 
  32. ^ Why gold, silver are up while inflation is low, The Dallas Morning News, September 26, 2010 Archived November 30, 2010 at the Wayback Machine
  33. ^ "iShares Silver Trust". Archived from the original on February 9, 2014. 
  34. ^ "Sprott Completes Initial Public Offering of Sprott Physical Silver Trust". Archived from the original on March 15, 2012. 
  35. ^ Silver, Buy or Sell? Archived April 23, 2014 at the Wayback Machine

External links[edit]