Silver Investment Guide for First Timers
Reading time: 15 minutes
Silver is one of the most widely recognised and attractive precious metal investments. However, making your first silver investment can seem a daunting task. In this guide, we’ll break down the ins and outs of silver investing, providing insights and tips to help you confidently enter the silver market.
Brief History of Silver
The story of silver dates back thousands of years, with ornamental and decorative silver found in royal tombs dating back to 4,000 BC. As civilisations evolved, so did the usage of silver. It transitioned from being a symbol of wealth and prestige to a vital component of commerce and trade, helping to shape the global financial landscape.
The Lydians, an ancient kingdom in present-day Turkey, were the first to use silver as a form of currency around 700 B.C. They minted coins from electrum, a naturally occurring alloy of gold and silver. This innovation revolutionised the concept of money and laid the foundation for modern currencies.
Silver became the backbone of monetary systems throughout the Roman and Greek empires. The Denarius and Drachma, their respective silver coins, served as the primary medium of exchange for trade and commerce. The Spanish Empire, in the 16th and 17th centuries, capitalised on the rich silver mines of South America, especially in Bolivia and Mexico, to grow their economic dominance.
Some currencies, known as the silver standard, were pegged to silver’s value throughout history. The UK, US, Holland, China, and India all pegged their currencies to silver at one point, although this practice ended with China and Hong Kong in 1935. After embracing fiat currency in the 1970s with the Bretton Woods agreement, the world moved from pegging currencies to precious metals.
Nowadays, silver is considered a store of wealth and is essential in many industries, including technology, medicine, and solar energy. Electric vehicles, for example, require silver products to operate, while its potent antibacterial properties make it a popular choice for many creams and wound dressings.
Investing in Silver vs Gold
When it comes to precious metals, many often consider silver and gold good investments. Unlike more niche precious metals, like platinum and palladium, physical silver and gold are relatively easy to buy and sell through online dealers specialising in bullion. However, each has unique characteristics that may affect a decision to include It in your investment portfolio.
- Price: Gold has a higher price per ounce than silver, making it a more expensive investment. However, the lower price of silver can appeal to first-time investors looking for a more accessible entry point into the precious metals market.
- Volatility: Silver tends to be more volatile than gold due to its smaller market size and higher industrial demand. This increased volatility can offer greater short-term profit potential but carries a higher degree of risk.
- Market Trends: Both gold and silver are impacted by global economic and political factors, but they don't always move in tandem. For instance, during periods of economic uncertainty, gold may outperform silver as investors flock to gold as a safe-haven asset. Conversely, silver may see more significant price appreciation during economic booms due to its industrial applications.
Reasons to Invest in Silver
Silver investing offers several compelling benefits, making it a strong choice for a long-term investment portfolio. Here are some of the top reasons to consider silver investing.
- Inflation Hedge: Silver, like other precious metals, has a relatively fixed supply; while silver mining occasionally uncovers new deposits, there’s ultimately a finite amount of silver on Earth. This makes silver a strong inflation hedge that can help protect the value of your money.
- Portfolio Diversification: Adding silver to a diversified investment portfolio can help reduce your overall market risk. Silver is mostly uncorrelated to the stock market, meaning that it can insulate your portfolio from volatility and potentially improve long-term performance.
- Historical Store of Value: Silver has been used as a store of value and a medium of exchange for thousands of years. Its ongoing appeal as a valuable commodity lends credibility to its role as a long-term investment, particularly during a financial crisis or economic uncertainty.
- Use in Green Technology: Silver is a critical component in clean technology, like electric cars, solar panels, wind turbines, and more. With the world accelerating towards green technology, the limited silver supply and increased demand may result in price growth for years to come.
- Volatility: The increased volatility of silver compared to other asset classes can lead to significant losses, void of risk management techniques. While silver has retained its long-term value, short-term volatility may be financially and emotionally painful for inexperienced investors. This is why familiarising yourself with a demo account and forward testing strategies are often recommended by more experienced hands.
- Market Manipulation: The silver market has, at times, been subject to price manipulation, which can distort market dynamics and increase risk. It's essential to be aware of this possibility and research past instances of silver market manipulation to understand the risks.
- Global Economic and Political Factors: Silver prices are influenced by many global factors, including economic data, interest rates, currency fluctuations, and geopolitical events. These factors can create uncertainty and may impact the value of silver investments.
Silver Investment Options:
Investing in physical silver, also called silver bullion, allows investors to hold the tangible asset in their possession. This includes silver bars, coins, and jewellery which vary in size, design, and purity. Physical silver can provide a sense of security and control, as you directly own the asset. However, it also comes with additional considerations like storage, insurance, and potentially higher premiums over the spot price.
Exchange-traded funds (ETFs) offer a convenient and cost-effective way to gain exposure to silver without owning the real thing. These ETFs typically track the price of silver or a basket of silver-related assets, which can help to increase diversification. ETFs can be bought and sold like stocks, meaning they’re more liquid than physical metals. However, fees and expenses may apply, and you won't have direct ownership of the physical silver.
CFDs, or Contracts for Differences, are an option for traders and investors seeking leveraged derivative products. With FP Markets, you can trade silver CFDs against the Australian dollar, the euro, and the US dollar at competitive spreads.
Like other derivatives products, you do not own the underlying asset by trading silver CFDs. All CFDs are cash settled. For more information, consider checking out FP Market’s comprehensive explainer webpage on Metals Trading.
Silver Mining Stocks
Investing in silver mining companies allows you to benefit from the performance of firms involved in the exploration, production, and processing of silver. This option can offer higher potential returns and more diversification than directly investing in silver, but it also exposes you to the risks associated with individual companies.
Options and Futures Contracts
For experienced investors, options and futures contracts offer a way to speculate on silver price movements. These financial instruments involve agreements to buy or sell silver at a predetermined price on a future date. They can offer leverage and potentially significant gains but also carry a higher degree of risk and complexity.
Bars or Coins?
Silver bars have a lower premium over the spot price compared to coins, since the fixed processing costs are more spread out. Their uniform shape makes storage relatively straightforward, whereas tubes or individual coins can be tricky to store efficiently. However, their high value means it’s vital to verify the purity of silver bars before investing.
Silver bullion coins, meanwhile, are an easy way to start investing in silver. They’re highly liquid due to their recognisability and are collectable. Many governments also issue silver coins, which add assurance of purity and weight. That said, they come with higher premiums, meaning that you pay more per ounce of silver compared to bars, and large coin investments can be complicated to store/organise.
The Cost of Storing Silver
When it comes to storing silver, there are three primary methods: home storage, bank storage, or private vaults. Each comes with unique benefits and drawbacks.
Storing silver at home can be cost-effective compared to banks or private vaults, especially for smaller investments. However, it may require additional security measures, such as safes and alarm systems, which can add to the overall cost. It can also add extra costs to home insurance premiums.
Bank safety deposit boxes can offer a secure, off-site storage option. While banks typically charge annual fees for this service, they tend to be more affordable than private vaults. However, accessibility may be limited, and insurance coverage is not always included.
Private vaults are specialised storage facilities that offer the highest level of security and typically include insurance. While they may be more expensive than banks, private vaults usually provide better accessibility and personalised service.
When and Where to Begin Your Silver Investment
Embarking on your silver investment journey should be done with careful consideration of your investment goals and risk tolerance. First, determine your primary objectives for investing in silver. This might be wealth preservation, portfolio diversification, or capital gains. Decide how much of your portfolio you’re willing to allocate to silver.
Consider trading precious metals with FP Markets, a brokerage that understands the needs of traders and investors:
- Trade long and short the silver market against several different major currencies.
- Utilise powerful trading platforms with real-time gold and silver news and charts, including MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader.
- Trade anytime, anywhere, across multiple devices.
- Rich educational resources and Trading Tools to hone your Trading Strategies.
- Hedge Risks. Hedge your investment risks with high-value assets like gold and silver.
- Benefit from low-margin, low-cost trading without compromising execution.