How to Invest in Silver

When times are bad, people start looking to invest in precious metals like silver and gold. In this article, you will not only find out how to invest in silver, but also tips for investing in silver and why you might choose silver over gold.

Before we get started, know that silver is much different than investing in gold, in spite of them both being precious metals, so be sure you take the time to educate yourself about investing in silver before jumping right in. You can find out more about the difference between the two in our article, Silver vs Gold, which I would consider mandatory reading before diving in to the silver market.

How to Invest in Silver – Buying Silver

There are two mainstream methods for those looking to invest in silver: buying bullion or buying into an EFT. There are advantages to each approach, which will be listed below.

Silver bullion (physical silver held for investing purposes) is typically sold as bars and coins. Given that silver is much cheaper than gold, bars of silver are much more accessible for the average investor. As a result, investing in silver bars is more common than buying gold bars.

Coins are also an option for those looking to invest in silver bullion, with the most popular coin in the USA being the American Silver Eagle (which weighs 1 troy oz). It is important for those looking to get into silver as an investment that you do not buy uncirculated collector-grade coins. The reason for this is that collector’s coins are typically marked up over the spot (market) value of silver. These are not readily sold and you do not want to pay a marked up price for silver as then you will struggle to make any profit off of your investment. You can learn more about this investment option in our article on How to Buy Silver Coins.

The other option is to buy into a silver ETF, or exchange-traded fund. The most popular one of these on the NYSE is marked as SLV and owned by iShares. At the time of this writing they have over 300 million troy oz of silver that you can buy into. When you buy into a fund like this, you own the equivalent of 1 troy oz of silver (at the time of this writing – other ETFs only offer 1/10 an oz so do your research).

Personally, I think it is much easier for investors to opt for the ETF, but some people just like to own the physical silver. The downside to owning silver is its hard to buy and sell and you have to have somewhere to keep it. Getting an insurance policy for it also eats into your profit.

Find out more about investing in physical silver in our article, How to Buy Silver Online. However, you can also buy silver virtually (stored offsite, not at your house) for the lowest possible fees. We recommend this over owning your own silver. You can read about virtual silver in our article on the Best Way to Buy Silver. There are two ways you can use to in invest silver through your computer with minimal fees.

How to Invest in Silver – Why Silver

Investing in silver is a risky proposition. You should know three things about silver:

• Compared to gold, there is actually not very much investment-grade silver on the market. The gold bullion market is many times larger than the silver market.
• The price of silver is tied much higher to supply and demand than gold is; the demand of silver for use in industry can greatly affect its value

Other than that, silver is often tied to the state of the market and inflation. When inflation is high and the market is poor, silver prices tend to rise. However, gold is typically the investment of choice for protection against inflation. For more information on why people buy silver, see our article entitled, Why Buy Silver? There are a lot of reasons people invest in silver, but make sure your reasons are smart like the ones outlined in that article.

Instead, investors bullish on silver are betting on high inflation and a shortage of silver. After all, silver is a much smaller market for investing than gold, which makes its prices much more volatile. However, there is more to it than that. See our article, Is Silver a Good Investment? for more details on the intricacies of the silver market.

Investing in Silver – Tax Rates

In the USA, silver is considered a collectible if owned for over a year. As a result, capital gains (if you sell silver for more than you bought it) are taxed at a significantly higher rate. This is something to keep in mind when you are thinking about your long-term investing strategy and when analyzing the returns on investing in gold and silver.

How to Invest in Silver – Conclusion

You now know how to invest in silver; you can either buy bullion (in the form of bars or coins) or buy into an exchange-traded fund. Buying into an ETF is easy, though they may be a few percentage points off the market rate. Buying silver bullion can be done through a dealer and depending on your country and area, even at some banks.

How The Gold Market Works

Exploring the intricacies of how the gold market works would take volumes. This primer covers the basic operation of the market and the primary indicators of activity – essential information for making informed investments.

Over-the-Counter

The gold market has two distinct segments. Almost all trading of physical gold takes place on the over-the-counter market (OTC), centered primarily in London, New York, and Zurich. OTC trades are direct unstructured transactions between principals – mining companies, central banks, and industrial consumers. The standard size of OTC gold trades ranges from 5,000 to 10,000 ounces. Investors and speculators can also trade in OTC derivatives similar to those discussed below.

Because physical assets are bought and sold, the current OTC gold market price is an important benchmark. The London fix - the most widely used indicator - is calculated twice daily (the AM fix and the PM fix).

And Into the Futures

What most people think of as the gold market is actually the gold futures market, the trade that takes place on exchanges such as the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), and the Tokyo Commodity Exchange (TOCOM). Investors in these exchanges speculate on the movement of the price of gold. The principal indicator is the spot price - the quote price for gold to be delivered and paid for on the settlement date two days into the future. The spot price is heavily influenced by the London fix.

Exit Gold, Enter Paper

Derivatives, instruments that settle further into the future than the spot settlement date, were introduced into the gold market to hedge against adverse movement in the spot price. There are two basic types of derivatives, although each has numerous complicated variations.

Futures are contracts to buy or sell a specified quantity of gold at a set price on a fixed future date. Delivery dates and unit quantities are standardized by the exchange. Futures trade is buying and selling futures contracts; physical gold is rarely delivered.

Options are a variation on futures that give the holder the right – but not an obligation - to buy (call option) or sell (put option) a specified quantity of gold at a set price on or before a specified date. Options are also standardized by the exchanges.

Out of the Exchange and Into the Stock Market

In 2003 the exchange-traded fund (ETF) introduced a form of gold trade into the stock market. These instruments are backed 100% by gold, although the holder never has possession of the physical asset. Similar instruments backed by futures are also available. Although ETFs may appear to simplify investing, they introduce another layer of risk while having none of the benefits of owning physical gold.