Why
Silver?
Silver,
like other precious metals, may be used as an investment. For over
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 common form of currency.
The price of silver is notoriously volatile, as it fluctuates between
industrial and store of value demands. At times this can cause wide
ranging valuations in the market, creating volatility.
Silver often tracks the gold price due to store of value demands,
although the ratio can vary. The gold/silver ratio is often analysed
by traders and investors. Over most of the 19th century the gold/silver
ratio was fixed by law in Europe and the United States at 15.5, which
meant one troy ounce of gold would buy 15.5 ounces of silver [1].
The average gold/silver ratio over the 20th century was 47.0
Factors influencing the silver price
Private and institutional investors
From 1973 the Hunt brothers began cornering the market in silver,
helping to cause a spike in 1980 of $49.45 per ounce and a reduction
of the gold/silver ratio to 17.0 (gold also peaked in 1980, at $850
per ounce) [4]. 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. In 1997, Warren Buffett purchased
130 million ounces of silver at $4.40 per ounce (total value $572
million). Similar to gold, the silver price has more than doubled
in value against the United States dollar since December 2001 [5].
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: SLV), which as of April
2007 held 130 million ounces of silver as reserves.
War, invasion, looting, crisis
Silver prices rose, reversing August 29, 2006 falls, as the metal
found support from August 31 UN deadline for Iran to suspend uranium
enrichment or face sanctions and as the dollar remained weak. Spot
silver was at 12.49 usd against 12.19 usd at August 29 close.
Methods of investing in silver
Bars
A traditional way of investing in silver is by buying bullion bars.
In some countries, like Switzerland and Liechtenstein, bullion bars
can be bought or sold over the counter of the major banks.
Physical silver, such as bars or coins, may be stored 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.
Various sizes of silver bars:
" 1000 oz troy bars. - These bars weigh about 68 pounds avoirdupois
(31 kg), and vary about 10% as to weight, as bars range from 900 oz
to about 1100 oz (28 to 34 kg). These are COMEX good delivery bars.
" 100 oz bars. - These bars weigh 6.8 pounds avoirdupois (3.11
kg), and are among the most popular with retail investors. Popular
brands are Engelhard and Johnson Matthey. Those two brands cost a
bit more, usually about 40-50 cents per ounce above the spot price,
but that price may vary with market conditions.
" 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 extra risk due to the lack of good brand name.
" 1 kilogram bars (32.15 oz)
" 10 oz bars and 1 oz bars (311 and 31.1 g)
Coins
Buying silver coins is another popular method of physically holding
silver. One example is the 99.99% pure Canadian Silver Maple Leaf.
Coins may be minted as either fine silver or junk silver, the latter
being older coins with a smaller percentage of silver. For example,
U.S. pre-1965 half dollars, dimes, and quarters are 90% silver.
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.
Rounds
Some hard money enthusiatists 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 an 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 random
assorted batches.
Certificates
A certificate of ownership can be held by silver investors instead
of storing the actual silver bullion. Silver certificates allow investors
to buy and sell the security without the hassles 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, denominated in $5 and $1, was once a silver certificate.
Accounts
Most Swiss banks offer silver accounts where silver can be instantly
bought or sold just like any foreign currency. 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. Many digital gold
currency providers, such as e-gold and GoldMoney, offer silver as
an alternative to gold and work on a similar principle. Other electronic
silver accounts include the eLibertyDollar and Phoenix Silver. Silver
accounts are backed through unallocated or allocated silver storage.
Mining companies
These do not represent silver at all, but rather are shares in companies
that mine silver. 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.
Spread betting
Firms such as Cantor Index and IG Index, both from the UK offer the
ability to take a bet on the price of silver through what is known
as a spread bet.
Derivatives
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 [7].
Taxation
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 recognised 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 17.5% in the United Kingdom, for example).
Other taxes such as capital gains tax may apply for individuals depending
on citizenship and if the asset is sold at increased value.
