Is it worth spending your hard-earned money on silver as opposed to gold?
Guide to buying silver and the role it can play in your investment portfolio
Dubai: As opposed to its shinier counterpart, silver can be a good investment — both as a cheaper alternative to gold and also for some intrinsic qualities of its own. However, silver also comes with unique considerations and risks that investors need to consider.
Gold dominates the spotlight when it comes to safe investing, often considered the go-to for those looking for an alternative investment to traditional stocks and bonds. But from time to time, the financial spotlight falls on silver, and it shoots up in price, even outperforming its yellow-metal peer in the market.
This is why many investors, both new and experienced, turn towards commodities like silver when the stock market has a poor outlook or in times of global economic recession or geopolitical turmoil. Here are a few other key reasons why silver is considered a good investment.
• Inflation hedge: Silver also acts as an inflation hedge, given its inherent worth, unlike currencies. Silver holds long-term value, especially when interest rates are low and fixed-income investments aren't earning much.
• Relatively cheap: Silver is comparatively less pricey when compared to gold. Globally, its price has never exceeded $50 (Dh183) an ounce. Gold trades in the four figures. So silver is much more affordable.
Gold versus silver: Which is better?
The two precious metals have several major differences. The silver market is much smaller than the gold market, and as it's more thinly traded than gold, silver can demonstrate far greater volatility, or price swings, than its glittering counterpart.
For instance, historically, the grey metal has frequently leapt nearly 15 per cent in a single day, for example. Moreover, silver also takes up more physical volume than gold.
Since the same size investment literally buys more silver than it does gold, meaning holding silver will take up a lot more space and will cost more to store and transport – not to mention that it tarnishes too.
If you were looking to sell silver, you will likely have a more difficult time finding a buyer compared to if you were selling gold.
The primary reason experts cite as the reason for this is the gold market’s recognition as being comparatively more widely known and the fact that it offers a wider array of safer, reputable places to invest.
Although such factors can affect gold, which also has its industrial uses, overall, gold is more driven by investor sentiment. So gold acts as a better, purer hedge against the economy and stock market.
4 different ways to invest in silver
1. Coins or bullion
Owning physical silver, either as coins or bullion, is a way to invest in silver. You have possession of it and can use it, if necessary. Additionally, it’s relatively easy to access in some cases.
If the price of silver rises, you can make a profit on silver coins and bullion, but that’s the only way you’ll make money, since the physical commodity does not produce cash flow, unlike a quality business.
2. Silver futures
Silver futures are an easy way to bet on the rising or falling price of silver without any of the hassles of owning physical silver.
Silver futures allow buyers, commonly referred to as ‘price speculators’ to play the silver market because of the high amount of leverage (borrowed capital) available in futures contracts.
With silver futures, you have to put up relatively little capital to own a relatively large position in the metal. If silver futures move in the right direction, you’ll make a lot of money very quickly, though you can lose it just as quickly if you’re wrong.
3. ETFs linked to silver, silver miners
If you don’t want to own physical silver directly but also want a lower-risk method than futures, you can buy an exchange-traded fund (ETF) that owns physical silver. You’ll have the potential reward for owning silver if the price rises, but fewer risks such as theft.
An exchange-traded fund (ETF) is a type of investment fund, which is an exchange-traded product with capital invested in multiple products, and they are traded on stock exchanges. An ETF that owns physical silver will deliver the return of silver prices minus the ETF’s expense ratio.
If you’re not looking to do a lot of analysis on silver miners but still want the advantages of owning a stake in a mining company, you can turn to an ETF that owns silver miners. You’ll get diversified exposure to miners and lower risk than owning one or two individual mining stocks.
ETFs offer another advantage, too. You’ll be able to sell your silver at the market price, and the funds are highly liquid. So you’ll be able to sell your funds at what’s likely the best price, and you can do so on any day the stock market is open.
4. Silver mining stocks
You can also take advantage of a rising silver market by owning the stocks of companies that mine the metal.
By owning a small stake in a miner the advantage is two-fold. Firstly, if the price of silver rises, the company’s earnings should rise along with it. In fact, silver miners’ profits will rise faster than the price of silver.
Secondly, the miner can raise production over time, also increasing its profits. That’s an extra way to win with silver, over and above just betting on the price itself.
3 risks to buying silver or silver-exposed assets
1. Risk of overpaying, turning it into cash
It can be easy to overpay for physical silver. While monitoring the spot price helps you get a fair price, making purchases hastily often leads you to overpaying for the metal.
If you are urgently in need of cash, you may not be able to get the full value for your physical silver, especially if you need to go through a dealer. If you’re buying collectible coins, you’ll likely pay extra for the collectability of the coin, meaning that you’re overpaying for the actual silver content.
2. Risk of leverage when buying silver futures
The leverage (borrowed capital) in future contracts magnifies your gains, but also your losses. If the market moves against you, you’ll have to put up more money to hold the investment position (buy or sell) you have taken. If you can’t, the broker will close out the position and you’ll be stuck with a loss.
Futures are risky, and they’re more suitable for sophisticated traders. You’ll usually need a large account balance to get started, too. Finally, only some online brokers offer futures trading.
3. Risk of unusually higher volatility with silver
Like gold and other commodities, silver can be comparatively higher volatile, especially over short periods. But with an ETF you’ll be able to dodge some of the bigger risks of owning physical silver yourself, namely the risk of theft, the illiquidity and the poor pricing when it’s time to trade.
Additionally, when it comes to investing in mining stocks, volatility is a factor that can affect your profits. As their profits depend on the volatile price of silver, mining stocks can be volatile, too.
Verdict: Is it worth putting my hard-earned money in silver versus gold?
Market experts and economists always recommend investing in a risk-free low valued asset like silver. It is so because neither your money will be blocked nor the value of silver will depreciate.
UAE-based commodity analysts widely reiterate that the same amount of dirhams buys you a lot more silver than gold, and silver has the potential to offer more profit.
However, it's ordinary to compare silver to gold as an investment. They share the same tangible asset strengths, when countered against stocks and stock markets, and also their statuses as safe havens against global shocks and as inflation hedges.
Price of gold has always trades at exorbitant prices because of the huge imbalance in its demand and supply. The global trend and brand name of gold also contribute in its unreasonably high pricing.
But comparatively, in terms of investing in gold versus silver, it is noted that that silver is still traded at a much economical price. Even the petty investors can go ahead and invest in silver easily.
This is why silver is known as a poor man’s gold, because comparatively gold, which is traded at over $1,800 (Dh6,611) per ounce, silver trades at about $25 (Dh100) per ounce.
Investors buy gold for the purpose of accumulation, but silver has many other industrial applications apart from investment. When it comes to usefulness, if we compare gold and silver investments, silver is considered to be a lot more beneficial metal than gold.