Many investors wonder how to invest in silver in the most appropriate way, since, traditionally, silver has withstood inflation well and has contributed decorrelation to investors’ portfolios. When all else goes wrong gold ira companies reviews, silver becomes one of the best investment alternatives, just like gold.
Silver as an active refuge
Silver has normally been associated as a safe haven asset, but it is much more than that, it is a natural element that has many uses in different fields, ranging from industry to luxury. Historically, gold has had a role closely linked to the monetary field. This historical fact is due to its properties, of which the five most important are the following: its scarcity, its durability or resistance, its divisibility, its homogeneity and its difficult falsification.
Differences between gold and silver for investors
The main difference between gold and silver for investors, is that silver has a much more industrial use than gold, therefore, silver in relation to gold has to be more valued as a raw material. This does not mean that silver is a raw material per se, but in relation to gold it is, on the other hand, if we compare it with steel, this valuation would change.
Because of this industrial attribute, there have been large discrepancies between the value of silver and gold. Gold has covered inflation, it is an international currency, it is relatively not very volatile and it is the store of value par excellence. Silver, however, has a great industrial use, has not covered inflation and is much more volatile than gold. Due to these qualities, it seems that having gold in the portfolio is more interesting than silver, but it also has good qualities and depending on the period, silver has been a better investment than gold, as has happened recently. In the image below we see how silver from the lows of the pandemic to the highs of the post-quarantine rally, silver appreciated more than 100%, while gold did it around 30%.
Risks of investing in Silver
The risks of investing in silver are not as limited as those of gold, but it could be said that the main risk of investing in silver is mainly the opportunity cost, since, if we invest in it, expecting a recession and finally an expansive cycle arrives. While the entire stock market rises, your investment in silver will fall or remain flat. Another risk is deflationary pressure, since if a crisis comes, where silver is supposed to perform better, but is linked to a very strong deflationary trend, silver may not behave at all well, since it does better with inflationary tensions. Lastly, there is some cyclical risk Since silver, when used industrially, can have a cyclical component depending on the economic cycle or the particular industry where silver is needed.
How to invest in physical silver?
Investing in physical silver is the most traditional and most widespread option. It consists of the physical acquisition of a silver bullion, silver jewelry, silver coins or any element that contains mostly silver in its composition. This option has the advantage that you physically own the silver. On the other hand, it has the disadvantage that you have to bear some storage costs, since, being such a valuable product, most investors do not keep it at home. In this sense, there are different companies that are dedicated to the storage of any gold product. which offers you the possibility of physically buying gold but not having to store it, that is, you own the amount of silver you buy and that will also be 100% insured.
Highlight that the acquisition of physical silver is more related to the idea of acquiring the good more as a luxury good than as an investment asset.
How to invest in silver through the stock market?
Investing in silver through the stock market is a way of owning silver through a title that proves a right over the silver and not through its physical possession. This way of acquiring, which as we will see below has many variants , has a more investment focus. Like everything, it has pros and cons in each of its different branches.
Investing in silver ETfs
The Silver ETFs are ETFs that seek to replicate the behavior of silver. Although the fund has a legal obligation to have all derivative contracts issued backed by silver, the ETF holder owns that derivative contract (ETF) that replicates the price of silver, and not a proportion of the reserve. This. In this way the investor, holder of the derivative, is exposed to the returns of the precious metal.
The advantages and disadvantages of silver ETFs are a projection of the advantages and disadvantages of general investment in ETFs. Investing in a silver ETF and not a physical one has the advantage that it requires a lower cost, both for investment execution and storage. In addition, as they are listed on the market like any share, they have the advantage of having greater liquidity compared to investment funds, giving the possibility of liquidating the position at any moment in the market.
On the other hand, it has the disadvantages that the investor did not physically own the silver, but rather a title (right) on some silver reserves. There is a possibility that the ETF will not faithfully replicate the price of silver, it will depend in part on how the ETF is made up. The ETFs are subject to commissions in their purchase, it will be necessary to take into account what are the commissions that they can charge us for the operation and what impact it will have on the replication of the price of silver.
Investing in silver-backed ETFs is the fastest growing form of silver investment in recent years. If we are interested in this investment vehicle to acquire the advantages of having gold in our portfolio, here is this article on which are the cheapest brokers to invest in ETFs. In the table below we also leave different ETFs with which to invest in silver.
Invest in shares of listed companies in the gold sector
Investing in shares of companies listed silver is the most direct way to invest in silver. We are going to differentiate two main types of businesses that operate in the sector with different business models: pure mining companies and royalty companies. In either of the two options, we expose ourselves to a greater risk than in the rest of the alternatives, which implies that we can enjoy both higher profits and higher losses. Within these two, the royalty business model can be more interesting and less risky.
Invest in gold miners
If we invest in silver miners, we are participating in the exploitation and management of a mine with silver reserves. But it is very difficult to find miners in which their main activity is silver, which makes it very difficult to find miners with great exposure to this precious metal. To give you an idea, only 30% of the annual supply of silver comes from mines. Whose main product is silver?
In addition, this type of business presents high uncertainty due, among other things, to the complexity of the exploitation, an activity highly demanding of capital, regulatory risk and geographic risk, since most of the mines are located in places underdeveloped. We can find ETFs composed only of these types of companies.
Invest in royalty companies
In turn, the company’s royalties are dedicated to finance the operation of a mine in exchange for a percentage, usually high, for the benefit of the exploitation of the mine. These companies usually have a broad portfolio of mines where they participate as investors. In this sense, royalty companies minimize the risk of a bad project by studying in depth the characteristics of the project. In addition, if a bad project is finally produced, being highly diversified, the impact on its results is less. As in the previous case, we can invest in ETFs composed only of these types of companies.
In any case, neither of the two previous alternatives is viable for someone who is not sufficiently informed about it and has the capacity to withstand high volatility.
Is it a good time to invest in silver?
Looking at all the conflicts that are currently unfolding, the low interest rates, the US elections and the real risk of a slowdown, or even a recession triggered by the coronavirus, it seems that it is not unreasonable to think that people will continue to support your investment strategy in buying gold in order to reduce risk and further diversify your portfolio. Therefore, we could be facing a good time in the cycle to buy silver.