How to Invest In Silver

Debbie Carlson
·7 min read

With gold's price up 12% this year, some investors are starting to pay attention to the yellow metal's sidekick -- silver.

Silver prices are roughly flat this year but are outperforming the S&P 500. Adrian Day, chairman and CEO of Adrian Day Asset Management, says some investors see value in the gray metal, which they believe is cheap in absolute terms and relative to the price of gold. He notes that silver-backed exchange-traded funds are seeing both increased volume and assets under management.

Initially, silver prices fell along with other commodities such as copper and crude oil, dragged down by concerns over the global economy falling into recession. Silver has a dual use as an investment and an industrial metal. Daniel Briesemann, analyst at Commerzbank, wrote in a research note that in recent weeks, silver has started to act like a bullion metal, which has lifted prices.

Some market watchers see a positive environment for silver as the Federal Reserve cuts U.S. interest rates as a hedge against inflation and as inflation-adjusted interest rates for U.S. Treasurys turn negative. Very low interest rates make precious metals such as silver and gold attractive, since these assets act as a store of value, offsetting the fact that no yield is paid.

[SEE: 9 Commodity ETFs to Buy Now.]

The perfect environment for silver would be low interest rates, a declining dollar, strong economic growth and increasing inflation, Day says. Although all four factors are not present, ultra-low interest rates help increase silver demand.

There are numerous ways to buy silver. Investors can buy silver coins and bars, invest in an ETF backed by physical metal and buy ETFs or mutual funds that include mining stocks.

Silver is sometimes called the "poor man's gold," but investing in silver isn't just a cheap gold proxy. Silver is about 1.5 times more volatile than gold, says Frank Holmes, CEO and chief investment officer of U.S. Global Investors, because of its lower price and the fact that it can act as both an investment and an industrial metal.

If you're thinking of investing in silver, here are some things to keep in mind:

-- Coins and bars are the traditional way to buy silver.

-- ETFs and stocks give investors a different way to own silver.

-- Silver has multiple uses.

Coins and Bars Are the Traditional Way to Buy Silver

To find baseline silver prices, Peter Thomas, senior vice president of Zaner Precious Metals, says investors should look at the London Silver Fix. This price is updated twice daily and is carried on most precious metals dealers' websites. Dealers use that price to set their bid and offer prices on physical metals.

Thomas says metals websites such as Golden State Mint or Upstate Coins show the premiums that dealers put on physical silver to deliver. Buyers can subtract the price of the London Silver Fix from the dealer price to find transparent pricing.

The easiest way to buy silver coins or bars is online through reputable dealers, says Terry Hanlon, president of Dillon Gage Metals, a metals trading firm in Dallas.

A good sign is if the dealer is a member of metals industry groups like the Industry Council for Tangible Assets or Professional Numismatists Guild. When researching prices, Hanlon says check a few dealers to get a sense of prevailing prices, as most dealers should be competitive where they offer to buy or sell silver.

Silver dealers also sell bags of junk silver, which are pre-1965 U.S. currency that contains 90% silver, such as Mercury dimes. Investors can buy bags of junk silver in quantities of $100 or $1,000 in face value, according to Asset Strategies International, which notes a $1,000 bag of silver dimes or quarters nets about 715 ounces of pure silver when melted.

Day notes that while buyers of junk silver do not get much value for the total weight of the bag, it is easily divisible since owners can sell off individual pieces.

When it comes to pricing, bullion bars have the least amount of dealer premium, Thomas says, because these products are simply silver poured into a mold. "It's not really labor intense," he says.

Bullion coins have a higher premium over bars because of the labor that goes into making blanks, stamping them, inspecting and sealing them in a case, Thomas says. The most popular bullion coins with the most consistent premiums are the 1-ounce Silver American Eagle from the U.S. Mint and the 1-ounce Canadian Maple Leaf from the Royal Canadian Mint.

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Silver can be included in individual retirement accounts, or IRAs, Hanlon and Thomas say. But the Internal Revenue Service has strict requirements on how these assets are stored and the type of coins -- American Eagles and Maple Leafs are permitted. Silver coins must be sent straight from the dealer to an approved custodial depository.

Hanlon says most investors focus on bullion bars and coins, while numismatic coins are for collectors. Numismatic coins have a market value separate from bullion, he adds. For example, when the U.S. Mint offered a commemorative 2019 proof silver dollar to celebrate the 50th anniversary of Apollo 11's moon landing, those coins were sold at a high premium over the silver bullion price, he says.

Physical bullion can be stored in a home safe, but for quantities of more than 1,000 ounces, which weighs at least about 70 pounds, investors should consider depository storage, Hanlon and Thomas say.

ETFs and Stocks Give Investors a Different Way to Own Silver

Investors who want exposure to the silver price but do not necessarily want to own physical metal can buy silver ETFs. The biggest by assets under management is iShares Silver Trust (ticker: SLV), at more than $8 billion. Day says the Sprott Physical Silver Trust (PSLV) is different from other silver ETFs because it allows owners to redeem their shares for physical metal and sometimes has premiums when the silver market is hot.

Day prefers to buy individual silver miner stocks versus a mining-company ETF because there are few pure-play silver miners left. He points out SSR Mining ( SSRM) and Wheaton Precious Metals Corp. ( WPM) changed their names because they were branching out to other metals.

Even so, he says, miners who have silver production in their portfolio will benefit from silver price rises. His picks for miners with silver production are Pan American Silver Corp. ( PAAS), Fresnillo (FNLPF) and MAG Silver Corp. ( MAG).

Pan American recently purchased a closed silver mine in Guatemala for what Day calls "a phenomenal buy" and is working with the community for input regarding when it reopens the mine. Fresnillo, a Mexican mining company, is the world's largest silver mining company, and MAG Silver has a joint venture with Fresnillo on a silver mine.

Silver Has Multiple Uses

Silver, like gold, can be viewed as a safe-haven investment during the end of a long bull run because it is a hard asset and a store of value. It can also be viewed as an alternative currency to fiat currencies such as the U.S. dollar or euro.

Unlike gold, which is largely used for investments and jewelry, silver straddles both the investment world and the industrial sector. In terms of industrial demand, it is used in solar panels, electrical switches, medical equipment and more.

[Read: How to Use Gold as an Investment in a Bear Market.]

About 70% of silver production is a byproduct of base metal mining, Day says.

Industrial use and supply affect silver's value. It's one of the reasons why silver production depends on the health of the economy and the industrial sector. Because silver is a byproduct, base metal miners are unlikely to ramp up production if silver demand suddenly spikes.

"This is why silver can have such dramatic moves because the supply doesn't always respond to the price," he says.

Briesemann says a good half of silver's demand is industrial. Although the global recession is hurting manufacturing usage, he expects that could change as industry starts to rebound in the second half of 2020. Silver should get dual support, from both industrial usage and from expected strength in gold.

"In line with the recovery in base metals prices that we expect, silver prices should also rise accordingly if industrial demand regains strength," he says. "Since gold should not fall significantly or sustainably, we see silver as being supported from this side as well."

Debbie Carlson has more than 20 years experience as a journalist and has had bylines in Barron's, The Wall Street Journal, the Chicago Tribune, The Guardian, and other publications. Follow her on Twitter at @debbiecarlson1.