Many investors nowadays are looking to move some or all of their portfolio away from traditional stock or bond investments and into precious metals like gold or silver. The motivations behind this are relatively simple, namely that traditional investments have been extremely volatile as of late, while metals have performed very well over the past 10 years.
This article will discuss some of the more common silver investments, as well as their advantages and disadvantages.
The silver investment that we advocate most is a purchase of physical silver bullion that you yourself hold. This is different from purchasing silver and storing it in a depository, or purchasing silver “on account”, as we believe the only way to truly own silver is to hold it in your possession.
If a true economic crisis came about, investors with silver in hand would be much more comfortable than those who were trying to extract it from a depository or account. Although we advocate holding physical silver, there are a few other silver investments one can utilize.
Silver exchange-traded funds, such as SLV, are funds that can be traded online through brokerage services like Fidelity or Smith Barney. Silver ETFs are investments into a trust which holds physical silver, but it is important to note that you are not actually purchasing physical silver. ETFs can never be redeemed for physical, so in a crisis situation you are likely left with nothing but paper.
Silver futures contracts are agreements to purchase or sell a fixed amount of silver at a fixed price at a specified future date. So, an example futures contract could be to purchase 5,000 ounces of physical silver at $32/ounce on July 1st, 2013. Futures contracts tend to correlate very closely with physical spot prices, so as silver moves up and down, the value of your contract changes accordingly.
Although futures contracts can actually be redeemed for actual physical silver bullion, the vast majority of these contracts are “canceled” out before expiration by buying or selling an offsetting contract, thus settling the balance in cash.
One unique aspect of silver futures are that they are highly leveraged, meaning that you can take on a rather large silver position with only a portion of the cash you would need to buy that much physical silver. This allows you to leverage up your capital, but also means potential gains as well as losses are magnified from even small market movements.
Silver on Account
Another way of gaining silver exposure is to purchase silver on account, meaning that you receive a certificate detailing your silver position, while the seller keeps and protects the actual physical silver for you. There are a few methods for doing this, namely allocated and unallocated accounts.
Allocated accounts means that you own specific bars and/or coins at the holder’s facilities. If you wish to redeem your physical silver, there are specific products in the vault that you can lay claim to. This is the safest form of account.
Unallocated accounts means that you own a specified amount of silver within a pool of other customer’s silver. The holder does not actually have to keep all of the silver on hand at any given time, as the likelihood of a run on their pool is very low. However, if there was a run, you could end up out of luck if the seller did not have enough silver on hand to meet their obligations.