Silver as an Investment

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 legal tender in the United States. (It continued to be used in coinage until 1964, when the intrinsic value of the silver overtook the coins' face value.)

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 analyzed 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. The average gold/silver ratio over the 20th century was 47.0

Investing Strategies

There are three important reasons cited by enthusiasts for holding precious metals, especially gold, silver, palladium and platinum, in every investment portfolio: strategic asset allocation, tactical asset allocation and hedging. Strategic asset allocation supposedly helps fully diversify a portfolio by balancing asset classes of different correlations in order to maximize returns and minimize risk. A recent study carried out by Ibbotson Associates suggested that allocating from 7 to 15.7 percent of a portfolio to precious metals results in increased returns and decreased risk. Hedging is a way of offsetting investment risk; the perfect hedge eliminates the possibility of future losses. The old Wall Street saying, "Put 10% of your money in gold and hope it doesn't work", neatly summarizes the hedging attributes of precious metals. And in today's economic climate, there are plenty of risks to hedge against: currency exchange declines, loss of purchasing power, and fat-tail events - sudden unexpected financial crises such as war, terrorism, natural disasters, health pandemics, derivatives accidents, collapse of a major bank or corporation, disruptions of the oil supply, and so on. However, this theory is controversial, as other financial experts from large banks and publications such as Money Magazine suggest you maintain no more than a 1% precious metal allocation in your portfolio. Whatever your financial position, always do your own research before committing significant sums of money to any investment.

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. (1965-1970 and 1975-1976 Kennedy half dollars are "clad" in a silver alloy and contain about 1/3 of the pre-1965 issues.)

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 three-pence. The tiny three-pence 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 enthusiasts 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.

Exchange-traded Funds

Exchange-traded funds (or ETFs) represent a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars. The silver ETFs are:

■  iShares Silver Trust (NYSE: SLV), launched in April 2006 by iShares.

■  Central Fund of Canada (TSX: CEF.NV.A, NYSE: CEF), which has 45% of its reserves
    held in silver with the remainder invested in gold.

■  In September 2006 ETF Securities launched ETFS Silver (LSE: SLVR), which tracks
    the DJ-AIG Silver Sub-Index, and later in April 2007 ETFS Physical Silver (LSE:
    PHAG), which is backed by allocated silver bullion.

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