During economic downturns or when a downturn is expected, many investors have taken comfort in owning precious metals. Designed to protect against inflation and ambiguity in the markets, this asset is often used to diversify against equities, reap benefits of a tangible good with use, and hedge against rising prices.
Here are the best and most popular ways to buy silver.
- Silver is often used as a portfolio diversifier and hedge against economic downturns and inflation.
- Investors can still buy physical coins or bullion, though it may be more difficult to store and protect against loss compared to other methods.
- Investors can own silver futures contracts for the right to acquire silver at a future date for a specific price.
- Investors can elect to diversify within the silver industry by owning shares of a precious metals ETF.
- Investors can also choose to buy stocks in silver mining companies to have ownership in future silver mining operations.
How to Buy Silver
Coins or Bullion
The traditional means of silver ownership is physically owning the precious metal, often in the form of coins of bullion. When physically possessed, silver can also be directly used in a variety of ways.
Physical silver can commonly be purchased online, though local dealerships or pawn shops may also offer carry physical silver. If you're looking to buy larger quantities or want to own physical silver not in the form of coins, you may need to see out a specialized dealer.
In addition to ownership of physical silver coins, there may be additional value in owning certain coins. For example, certain years, denominations, or rarity will trade for a premium. For investors hoping to simply own silver as an investment, it would be wise to avoid buying collectible coins and paying extra for the collectability of the non-silver characteristics.
One of the more common ways to invest in silver today is to buy shares of an exchange-traded fund (ETF). ETFs often own the physical silver, and investors simply trade ownership shares of the fund that owns the silver.
ETFs are a very accessible and liquid way of selling the tangible good. Silver can often be instantly sold at market price. Two of the largest ETFs that own physical silver are iShares Silver Trust (SLV) and Aberdeen Standard Physical Silver Shares ETF (SIVR).
Silver futures contracts are a form of derivatives that may or may not actually lead to ownership of any silver. Instead, a futures contract (regardless of the underlying commodity) is the right to buy or sell a good at a future price. Instead of owning the commodity, you possess the right to trade it.
Silver futures contracts are ideal for investors who want to wager on the rising or falling of silver prices without the difficulty of owning silver. Though futures contracts may result in taking physical possession of an order, most investors simply speculate and divest from the tangible good.
Investors often use leverage when trading future contracts, meaning a small amount of upfront capital is needed to trade a large amount of futures contracts. Though this may result in higher losses, it also gives greater investment potential and the opportunity for investors to earn more money they would have otherwise been able to only using their own capital.
Silver Mining Equities
An indirect way of investing in the silver industry is by investing in silver mining companies. This type of investment does not represent ownership in silver. However, it represents ownership of a company that attempts to extract the precious metal and can benefit from mining production.
The spot price of silver was right around $24 at the very end of 2022. This is in stark contrast to trading under $18 as of September 2022.
Advantages of Buying Silver
There are many pros and cons of buying silver, especially in each of the forms above. When considering how to invest in silver, be mindful that each method of ownership has its own unique advantages and disadvantages.
Coins or Bullion
There's often no purer way to own an investment than by physically owning it. By investing in silver coins or bullion, you can physically touch your investment. You do not rely on an internet connection or third party to manage your silver. You also do not risk the chance that an ETF has oversold or is inaccurately managing ownership shares.
Unlike gold, which is seen strictly as a store of value, silver also benefits from its wide use in many industrial applications. The metal has established uses in the automotive sector, across various electronics products, in solar panels, and in photography. New technologies such as silver oxide batteries, silver conductive inks, and various silver-based nanotechnologies in medical applications are all quickly becoming standards in their industries.
This industrial demand makes silver prices more volatile than gold and generally reactive to various measures of manufacturing data. Given this fact, ETFs that track silver prices or futures could be a better bet versus physical bullion, as they can be sold quite easily if investors think prices are too frothy. For investors looking to potentially quickly divest, ETFs is most favorable.
Most ETFs can be easily bought and sold, and many online brokers offer free trading of ETF shares. Also, though there are cybersecurity risks to consider, ETFs present an opportunity to not need to worry about the physical protection of your investment.
The ETF managers often issue monthly or quarterly reports on performance, changes to the fund, and relevant information investors likely need to know. This still offers some level of security and protection for investors who want to still keep control over their assets without needing to worry about physical possession or ownership.
The primary benefit of a futures contract is the ability to use leverage. Many investors put up a small amount of capital when entering into futures contracts with the potential to have exponentially larger returns should prices move favorably.
Futures contracts also have the unique benefit of leading to silver ownership but only at a price in which the investor wants. Investors may enter into contracts to buy at a specific price that may only execute should the price decrease; in this example, an investor likely will not have ownership should the price increase to a point that the investor does not feel comfortable investing at. Whereas investors may choose to buy a share of an ETF at market, investors must pick their own price with a futures contract.
Silver Mining Equities
Though silver mining companies aren't the same as owning silver, this poses an interesting benefit of being a partial diversification. Investors could theoretically buy both silver as well as silver mining company equity as a way to hedge some risk. In theory, the price movement of the mining company equity will be different than the commodity because there are other factors influencing the company's stock price.
Consider the costs of each method of buying silver. Though ETFs don't require a safety deposit box, they usually do come with a fund fee.
Disadvantages of Buying Silver
Coins or Bullion
As great as the tangible nature of silver can be, that is also its downfall. In many ways, it may also be harder to sell physical silver in a pinch. Physical markets may also not be tracking to the latest or most up-to-date spot pricing which may or may not impact your buying or selling price.
Buying physical bullion, of any precious metal, comes with added costs investors may not be thinking of. First, investors pay an average of 5% to 6% in commissions to acquire silver coins and bullion, depending on the source.
For example, the United States Mint produces several silver bullion coins, with the most popular being the one-ounce American Eagle. These coins sell at a stiff premium to spot silver prices. Likewise, other coinage mints such as The Royal Canadian Mint also produce several silver bullion coins. However, these coins carry a similar premium when purchased directly from the mint. Third-party vendors also exist, but again, premiums to spot are prevalent.
There are also the storage costs to consider. Safety deposit boxes at banks carry an annual fee and home safes can range into the thousands, depending on the size, while precious metals IRAs and custodial accounts come with yearly storage fees as well. For the cost of just one share that trades at roughly spot prices and as little as 0.50% in yearly expenses, investors can access silver via an ETF.
Perhaps the biggest is the counterparty risk associated with owning one of the ETFs or perhaps even more for investors owning an exchange traded note (ETNs) like the UBS E-TRACS CMCI Silver Total Return ETN (USV).
Shareholders don't actually own title to the metal itself unless they are an authorized participant in an ETF. On the other hand, when you own actual silver it’s yours. If the world goes “crazy,” you have the store of value directly in your own hands or vault. This fact underscores the number one reason why most investors choose precious metals in the first place: insurance.
A perfect example of the potential problems with counterparty risk stems from the bankruptcy at MF Global in late 2011. Investors who held warehouse receipts for silver bars within the firm’s accounts had their assets frozen and pooled together. The liquidating trustee in the court-approved bankruptcy paid these investors about 72 cents on the dollar for their holdings. In other words, these investors lost 28% of their bullion. With some silver participants claiming manipulation in the silver markets with regards to many of the big ETF/ETN sponsors, owning physical bullion could pay-off in the real end.
Finally, ETF fees do have an eroding effect on their underlying prices. Many of the physically-backed funds sell a portion of their bullion to pay for their expenses. Over time, this has caused share prices to track less than spot.
There are two primary disadvantages of investing in futures contracts for silver investing. First, investing in a futures contract does not explicitly result in silver ownership. Whereas investing in an ETF represents an ownership that has a claim to silver, a futures contract may never be in-the-price, meaning you may never exercise the right to pay at a favorable price.
Another downside to futures contracts is their complicated nature. Whereas other forms such as ETFs can easily transact in an instant, futures contracts are not for beginners and may be complex for first-time investors. In addition, investors likely have to pay fees for a chance to never actually own silver.
Silver Mining Equities
For as many benefits as owning a silver mining company may pose, it is not truly an ownership stake in silver. Silver prices may boom, but the success of the mining company's equity ultimately resides on the company's ability to successfully operate. Should the company face a deficit cashflow or catastrophic equipment incident, an investor may unfortunately sustain losses unrelated to silver ownership.
Silver mining companies may also be susceptible to uncontrollable forces that may move in opposite direction of silver. For example, imagine government invention that restricts the mining of silver. A silver mining company would be negatively impacted, while the price of silver would likely increase as there is now minimal change in supply and an increase in demand. Therefore, owning a silver mining company may not yield the same investment benefits as owning silver.
Buying Silver (All Forms)
Coins: Represent true, physical ownership of the precious metal
ETFs: Much easier to buy and sell; is often the most liquid option
Futures: greater opportunity to use leverage for greater returns
Silver Mining Companies: Can be used to diversify as company equity may move differently than silver
Coins: Increases risk of theft, storage costs, and is illiquid
ETFs: Exposed to counterparty risk and may incur losses if fund manager closes
Futures: May incur even larger losses and is harder to buy/sell
Silver Mining Company: Is not true ownership of silver and possesses unique, other forms of business risk
Is Silver A Good Investment?
Silver has a long-standing history of being a valid investment. For each investor, the answer may be different. For those looking for greater returns with higher risk exposure, silver may not be the best option. For those looking for a safer (not necessarily stable) investment with real-world applications and uses, silver may make sense.
Is It Better to Buy Silver Coins or Bars?
Buying coins, bars, or bullion typically results in the same risks. Each must be physically stored to protect against losses or theft. This storage, especially in a safety deposit box, may result in maintenance charges. To a degree, owning silver coins may make it easier to sell silver as buyers may limit the quantity they wish to own.
Where Is the Best Place to Buy Silver?
Each investor must address their own investment goals to answer this question. If investors simply want to capitalize on the changes in price of silver, an ETF or futures contract usually makes more sense. If an investor wants true ownership of silver with the greatest amount of control, coins or bullion makes the most sense.
The Bottom Line
For investors looking to gain access to the silver markets, owning both physical bullion as well as purchasing ETFs have their pros and cons. Investors may also consider investing in futures contracts or buying equity in a silver mining company. Each method exposes investors to the silver industry, though each option is vastly different from the others.