How to Invest in Silver: Holding Its Value During Recessions
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Precious metals like gold and silver are an ideal alternative to traditional investments like bonds and stocks. In tough times, professional investors turn to silver to hedge against inflation or invest defensively. It remains a top choice for many reasons, but many investors also see it as a means to generate value in uncertain times. Many investors see precious metals like gold and silver as a hedge against inflation, and for them, silver is a way to ensure that they have an investment that cannot be inflated away due to low-interest rates.
According to the Silver Institute, there will be a global silver demand of 1.112 bullion ounces in 2022, leading to a rise in silver production. This rise will be driven by silver industrial fabrication as its use continues to grow in traditional and green technologies. The demand for physical silver as an investment will jump 13% in 2022, hitting a 7-year high.
Silver benefits from its extensive use in industrial applications. New technologies that use industrial metal are also becoming standards in the industry. This makes silver prices more volatile and increases the industrial demand for metal. You can invest in silver in several ways, from owning it directly to owning shares in the companies that produce the metal. Let us look at all the different ways you can invest in silver. Each comes with its own rewards and risks.
In this article
How to invest in silver
Bullion or coins
Investing in physical silver, in the form of bullion bars or bullion coins, is a great way to own the precious metal. You can own and use it when needed while appreciating its value. That said, silver is also easy to get hold of, and you can easily buy silver coins. If there is a rise in the price of silver, you can profit from the bullion and coins, but that is the only way to make money. You cannot generate cash flow through an investment in a physical asset.
You can buy silver through local or online dealers like JM Bullion. Several specialized dealers will let you buy silver bars instead of just coins. On the downside, the risk is associated with buying silver coins and bullion. You could easily overpay for it, so note the spot price to get a fair price. If you need cash urgently, you might not get the full value of the silver if you go through a dealer. That said, if you plan to buy collectible coins, you must watch out since you will have to pay more for the collectibility. Finally, you will have to ensure that the silver is always safely stored.
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Silver futures
A great way to make a move on the rising or declining value of silver is through silver futures. You can make money from the volatility without actually holding physical silver. You can even take the physical delivery, but it is not the aim of those who engage in the future. It allows investors to play the market due to the high leverage in futures contracts.
You have to invest a small amount in owning a big position in the metal, and if the futures move in the right direction, you can make money in no time, but you can also lose as quickly if you are wrong. The leverage you find in future contracts will work in both ways, which can magnify your gains and losses.
When the market moves in the opposite direction, you will need to invest more money to maintain your position. But if you can’t put in the money, your broker will close the position, and you will have to bear a loss. Silver futures are certainly risky, and they are ideal for more experienced traders. That said, you will need a large minimum account balance to start with online brokers offering futures.
Mutual Funds
Mutual funds can help diversify the portfolio while reducing risks at a low cost. But most mutual funds will not hold silver as a physical asset. You can consider investing in mutual funds through equity precious metal funds. These funds will invest in various precious metals, including silver, gold, platinum, and diamonds. However, it helps to understand the expense ratio and returns before choosing a fund.
Silver ETFs
If you are unhappy about owning physical silver outright but want to consider a low-risk method, buy an exchange-traded fund (ETF) that invests in physical silver. If the price rises, you have the benefit of owning silver, but you do not have to worry about storage. An ETF will hold physical silver and will generate a return on its price after deducting the expense ratio.
It also offers another advantage, you can sell the silver at the prevailing market price while you enjoy the liquidity offered by the fund. So, you can sell the funds at the best price in the stock market.
You will find two ETFs that own physical silver: Aberdeen Standard Physical Silver Shares ETF (SIVR) and iShares Silver Trust (SLV). If you are an experienced trader, you can consider investing in the silver market through an ETF that holds futures contracts, but it is ideal for the short term and not the long term. Silver ETFs will allow you to dodge the bigger risks of owning physical silver and give you high liquidity.
Silver ETNs
Exchange-traded notes are a type of unsecured debt security that will track the underlying index of the security. It will also trade on major stock exchanges like stocks. An ETN is similar to a bond but does not have a regular interest payment. Rather, its prices fluctuate just like stocks.
You can invest in silver ETNs that will track the underlying index of silver. Financial institutions usually issue it, and the returns will be based on the market index. Thus, the repayment of the principal amount will be based on the performance of the underlying index. You will receive a lower maturity amount when the index goes down than originally invested.
An example of silver ETN is the VelocityShares 3x Long Silver ETN (USLV). However, you need to carry out research and understand the options before investing. If you do not know how ETNs work, speak to a financial advisor to help you decide.
Mining stocks
Make the most of the silver market by investing in the stocks of mining companies. You can benefit in several ways when you own stock in a mining company. When the price rises, the company will show a rise in earnings, and you will benefit from the rise in the stock price. Silver mining companies' profits grow faster than the cost of silver. And second, if the miner increases production with time, its profits will increase, and you will benefit.
But if you want to buy silver mining stocks, you need to do research and analysis on them and ensure that you are buying a quality company that has the potential to grow. Many mining companies are risky and suffer from the industry's volatility. Since the companies' profits depend on the volatility in the price of silver, mining stocks will also be volatile.
If you do not want to research and analyze the companies but want to invest in a mining company, consider investing in an ETF that holds the stocks of silver miners. This will help with the diversification of your portfolio while reducing the risk. Some popular ETFs are Global X Silver Miners ETF, ETFMG Prime Junior Silver Miners ETF, and iShares MSCI Global Silver Miners ETF.
The sector ETF will reduce the risks and costs of a single miner performing badly but if something hits the entire industry, like a decline in the value of silver, it will hit the fund and the company too. You need to pay attention to what is in the fund because all are not equal, and some might offer higher exposure to the best companies, but others might be riskier.
Investing in gold vs. investing in silver
Using the same amount of money, you can purchase more silver than gold and if you do not have a lot of extra money but have your heart set on investing in precious metal, silver could be a better place to begin with. Remember, the prices of all precious metals are volatile, and you may not generate consistent returns by investing in them. But whenever economic crises set in and the stock market is down, the metal prices will increase. You can use it as a hedge against inflation and remain to rest assured that your investment is not losing its value.
If you are investing in the metal, do not make the mistake of buying high but wait for a dip to make your move. Always buy low and sell high, no matter what you want to invest in.
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Pros and cons of investing in silver
Pros
- Tangible asset. Silver is different from other investments like stocks and bonds. You can hold silver coins or bullions and use them whenever you feel like it. You can also consider investing in silver jewelry.
- Hedge against inflation. Silver is a precious metal that works just like gold. In difficult times, it can be used as a hedge against inflation and you will not lose the value of your investment.
- Cheaper than gold. Silver is comparatively cheaper than gold and is more reachable for a lot of investors.
Cons
- Illiquid. If you own silver bars, coins, or bullion, you will not be able to turn them into cash when you are in need of funds. However, if you invest in stocks or silver ETFs, you can enjoy liquidity.
- Storage problem. Holding the physical asset will mean spending more on its storage and security of it.
- No cash flow. A problem with investing in silver is that it will not generate regular cash flow like real estate or a business can.
The bottom line
There are several reasons to add silver to your portfolio, and it will take you closer to your personal finance goals. Over a period of time, silver has outperformed top asset classes like stocks, and it can hold its value even during turbulent times. It is a great way to generate profits while enjoying high liquidity in the market. Silver will not generate cash flow, and you might not know when to buy. Owning silver bullion or silver bars will lead to a high storage cost. On the other hand, investing in the metal through stocks or ETFs is a good opportunity to make the most of the rising prices of the metal. If you are a beginner, the best way to make a silver investment is through ETFs.
Silver has a low correlation to the asset markets, meaning you can use it as a hedge against the stock market. No investment is without risks, and silver also has some. You should always use caution when investing in securities if you do not understand them and do not make the mistake of trying to time the market. Use silver as a tool to diversify your portfolio and put only 10% of the portfolio towards the metal.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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