People invest in precious metals for a variety of different reasons. Not only do precious metals offer important portfolio diversification benefits, but they can also offer a store of value, an inflation hedge, and protection in the event of a financial system crisis.
When we talk about precious metals, gold is often the metal that comes to mind. That’s understandable, as gold has been used as a store of value for thousands of years. However, for those looking to invest in precious metals, silver offers an excellent alternative to gold.
Let’s take a look at the key features of silver and explore some of the best ways of gaining exposure to this precious metal.
Both silver and gold have many attractions as investments. However, it’s important to realize that the two metals are very different and have unique properties.
Here’s a look at some key differences between the two metals from an investment perspective.
One of the main advantages of investing in silver over gold is that silver is considerably more affordable than gold.
For example, 1/10th troy ounce gold coins—the minimum size recommended for investment—cost about USD $150 as of this writing. Even a gram of gold will cost close to USD $50 at current prices.
This means that buying a position in silver is significantly easier than buying a position in gold. Silver is very affordable. Therefore, even with just a small capital outlay, investors can add diversification to their portfolios through precious metals.
Similarly, it’s also easy to sell silver in small amounts. This is especially true if it is bought in coin form. There are usually only small costs associated with the sale of coins. But more on that later.
Gold and silver have very different supply and demand drivers.
With gold, most of the metal’s demand comes from investment and jewelry demand. In contrast, almost half of silver’s demand comes from industrial use. The other half consists of investment and jewelry demand.
On the supply side, while gold is often mined directly, silver is usually not. Silver is usually produced as a result of mining other minerals such as gold, zinc, and copper. This means that unlike gold, if the price of silver rises, it is unlikely to result in the opening of new mines. Therefore, supply will be relatively constant.
From an investor’s perspective, this is a positive. With a constant amount of supply, an increase in demand has the ability to increase the price of the metal significantly. For this reason, a bull market in silver has the potential to be more powerful than a bull market in gold.
In recent years, the primary supply of silver has fallen.
This is because a number of major silver producers have been having trouble keeping up with production levels. This could have positive implications for the price of silver if demand rises in the future.
It’s also worth noting the different relationships of the two metals.
Gold tends to have a strong relationship with monetary variables such as inflation and interest rates. To illustrate the connection, we plotted the gold price and the US 10-Year Bond Index, which correlates to both inflation and interest rates.
In contrast, silver is more sensitive to economic variables, such as industrial production and manufacturing demand.
This means that the two metals may perform differently at different stages of the economic cycle.
For example, if inflation is increasing at a high rate, gold may perform well. In contrast, if demand for industrial products such as electronics and solar cells is increasing, silver may perform well.
Because the two metals have different sensitivities, many precious metals investors choose to own both silver and gold. This has the effect of reducing the risk to their portfolios.
Investors should be aware that the price of silver is significantly more volatile than that of gold. In other words, silver’s price movements are more magnified.
To illustrate the difference in volatility between the two metals, it’s worth looking at their performance in recent years.
At its peak in 2011, gold traded around USD $1,900/oz. Today, it is hovering around USD $1,300/oz. That’s a drop of over 30%.
In contrast, silver almost touched USD $50/oz in 2011, according to Thomson Reuters. Today it sits below USD $17/oz—a fall of nearly 70%.
To give you another example, let’s take a look at the chart below that plots gold and silver prices from 1975.
The lesson here is that when gold and silver fall in price, silver is likely to fall further than gold. However, the relationship works in reverse too. During a bull market in precious metals, silver can outperform gold by a wide margin.
The different characteristics of silver and gold mean that the two different precious metals may appeal to different types of investors.
Silver offers an excellent option for those looking to buy small quantities of precious metals. It can also be a good investment for those who do not mind large price movements.
In contrast, for those with more capital or those looking for less price movement, gold or a blended portfolio of gold and silver could be a good option.
Both metals, however, offer a proven store of value and a hedge against inflation. They also offer diversification against stocks, bonds, and property. Furthermore, they can offer protection from a financial system crisis.
With that in mind, owning both gold and silver together should be a consideration for investors seeking higher returns and lower risk.
Let’s summarize what we have covered above. Here’s a recap of the pros and cons of both silver and gold from an investment point of view.
There are a number of ways to buy silver.
Many investors choose to invest in physical silver through the purchase of silver bullion bars. Alternatively, some investors purchase sovereign silver coins such as the Silver Eagle coin or the Silver Maple Leaf coin.
Both silver bullion bars and Silver Eagle/Silver Maple Leaf coins are widely recognized worldwide. Furthermore, they can be bought at reasonably small premiums above the spot price of silver. For this reason, they are both highly liquid and easy to trade.
Before we look at specific silver products, let’s take a look at the advantages and disadvantages between owning silver bars or silver coins.
Silver bullion bars are rectangular slabs of silver that are produced by private mints.
There are two main types of silvers bars: cast bars and minted bars. Cast bars are created by heating the metal until it is a liquid. The liquid is then poured into a mold to create a solid bar of silver. This process is both simple and cost-effective. As a result, bullion bars can often be bought at relatively low prices.
Silver cast bars come in different sizes, usually from 100 oz to 1,000 oz. These bars are often favored by serious precious metal investors looking to buy large quantities of silver at the lowest price possible. This is because large silver cast bars can offer the lowest premium over the spot price, and take less space to store.
These bars offer excellent value, but the downside is that they cannot be broken down into smaller amounts. Plus, they are often irregular in weight and shape.
In contrast, small minted bars (10 oz) are cleaner and more refined than 100 oz or 1,000 oz cast bars. The minting process takes cast bars and transforms them into polished, refined bars of standard sizes. 10 oz bars are typically packaged to prevent oxidation.
The manufacturing process of minted bars is more costly, and these bars therefore command higher premiums than larger bars. However, while they are more expensive, small minted bars do have their advantages.
They give investors the flexibility to sell smaller amounts of silver at any time. They are also easier to resell as they usually don’t have to be tested for quality. Therefore, these bars are much more suitable for smaller private investors.
Silver coins are produced by sovereign governments and have legal tender status. They generally come in different sizes, ranging from 1 oz to 5 oz with 1 oz coins being the most standard and liquid choice.
Given their small size and denominations, silver coins are easy to trade and highly liquid. Because they have legal tender status, they retain more of their value and are easier to resell.
Another advantage of coins is that their bid-ask spread is typically lower than that of bullion bars. This means that the costs of buying and selling coins are lower.
A side note: when buying precious metals, investors should always look at the spread between the purchase and selling prices. The spread will have a big effect on final profits.
Minting and distribution costs are high compared to to the value of the silver in the coin. As a result, silver coins are often sold at a higher premium above silver spot prices than silver bullion bars.In the next section, we’ll take a deeper a look at two popular silver coins, the Silver Eagle and the Silver Maple Leaf.
The unique attributes of bars and coins mean that the different silver products will appeal to different types of investors.
Bars offer an excellent choice for those looking to buy large quantities of the metal.
In contrast, for those looking to buy smaller amounts of silver or those looking to trade often, coins may be a good option.
The American Silver Eagle is a bullion coin produced by the US Mint. It has been minted since the 1980s and features a modern interpretation of Adolph A. Weinman's classic "Walking Liberty" design on its front.
Silver Eagle coins are minted from 99.9% pure silver. They contain one troy ounce of the metal. They are minted with the legal value of one US dollar and are legal tender anywhere in the US. However, the current market price is currently close to 20 times the tender value.
Key advantages of buying Silver Eagle coins are that they are easily recognizable and are the most liquid form of silver bullion available. They are both small in size and highly liquid. Therefore, they are easy to trade. A disadvantage of Silver Eagle coins is that because they are so popular, they are sold at a hefty premium to the spot price of silver.
Silver Eagle coins are well-suited to smaller investors with limited capital. Investors looking to buy large quantities of silver may be interested in purchasing large bars or Monster Boxes of Eagles.
Insider’s Advice on Silver Monster Boxes
Monster Boxes are sealed boxes sold by the US mint. They contain 500 Silver Eagle coins (500 oz). Despite the large quantity purchase, coins in a Monster Box usually sell at a small premium over loose coins. This is because the minting costs are the same. Furthermore, the US mint charges for the cost of the box.
Why would large investors consider buying Monster Boxes if they can’t get a discount?
The answer is that sealed Monster Boxes also sell for a higher premium than loose coins. Usually, the spread between purchase and sale price is narrower than for loose coins.
The reason for the lower spread is that buyers know that the coins held in a sealed Monster box are uncirculated and perfect. Therefore, there is no need to inspect the coins.However, it's important to note that as soon as the seal on the Monster Box is broken, the coins will be priced as loose coins. Therefore, investors cannot sell a partial box without losing some value.
Silver Eagle Coins
Silver Monster Boxes
Another popular silver coin, the Canadian Silver Maple Leaf bullion coin also contains one troy ounce of silver. However, this coin is minted from 99.99% pure silver. The Maple Leaf has been produced since 1988. It has always featured Queen Elizabeth II on its front.
The maple leaf, which the coin is named after, is featured on the back of the coin. However, there has been a host of special edition coins that have been released over the years. The last redesign of the coin in 2014 saw new security features introduced to discourage counterfeiting.
The Silver Maple Leaf coin is legal tender in Canada and is minted with a legal value of five Canadian dollars. This is approximately 25% of the current market value of the coin. With the exception of its higher purity and legal value, the Silver Maple Leaf is almost identical to a Silver Eagle coin from an investment perspective.
The Maple Leaf is a beautiful, easily recognizable sovereign coin that is both highly liquid and easy to trade. It usually sells at a lower premium over the spot price than the Silver Eagle.
There are several other well-known sovereign coins available such as the Britannia (Great Britain) and the Philharmonic (Austria). Most of these coins offer similar advantages to the Eagle and Maple coins.
They are beautiful coins that are easily recognizable, reasonably liquid, and well-accepted. As such, they retain their value and are decent investments. However, there is less demand for these coins from investors in North America.
Many private mints offer a wide choice of silver coins (sometimes called rounds). Because of minting costs, these coins usually still sell at a significant premium over spot prices.
Buyers should be aware that because these coins are not standard products, produced by a sovereign mint, they are not as recognizable. As a result, they generally sell at a discount over the spot price (at best spot price minus melting costs). And generally, these coins are very poor investments.
Similarly, sovereign mints will often offer special edition coins (commemorative coins or minted coins). These are sold at much higher premiums than standard Eagle or Maple coins. Unfortunately, the premiums usually disappear when the coins are resold; therefore, these coins are not recommended as investments.
Investors should be aware that many bullion dealers will steer potential customers toward purchasing special edition coins and various types of commemorative silver coins. This is because these coins generate higher margins for dealers.
Unfortunately, none of these dealers will offer you any premium when you try to sell the coins back.
As we discussed before, silver bullion bars come in a variety of different sizes.
Smaller investors may be interested in smaller minted silver bars in sizes such as 1 oz or 10 oz. In contrast, investors looking to purchase large quantities of the precious metal might be more interested in larger casted 100 oz or 1,000 oz bars.
Smaller minted bars share many of the same attributes as silver coins. They are well-accepted, highly liquid, and easy to trade.
Larger casted bars often have irregularities in shape and size and are therefore generally purchased by institutional investors and commercial buyers who do not mind the appearance of the product.
Both silver bullion bars and silver coins are effective ways of purchasing physical silver. However, some investors will prefer to buy bars while others will prefer to buy coins.
For those looking to buy large quantities of silver with the lowest premiums over the spot price, large silver bars are likely to be the most effective way to buy silver.
Silver bullion bars are easy to store and transfer. Therefore, they are an excellent option for the serious precious metal investor who is not interested in taking delivery of the silver, and will keep the bars within the chain of custody in an LBMA approved vaulting facility.
Investors looking to acquire smaller quantities of silver are better off buying Silver Eagle coins, Maple Leaf coins, other well-known sovereign coins, or possibly smaller 10 oz bars. These silver coins and bars are recognizable all over the world. They are also highly liquid and very easy to trade.
A side note: Investors interested in taking delivery of their coins outside LBMA vaulting facilities should understand that they will break the chain of custody. This means that they are limiting their resell options and may lose some value upon resale.Should they wish to have some silver holdings on hand, it is advisable to only buy and store the most recognizable and established Silver Eagle or Maple Leaf coins.
Precious metals can play an important role in investors’ portfolios. They have the ability to add diversification and provide a store of value. They can also provide inflation protection and monetary system protection.
While gold is generally the most popular precious metal, silver offers an excellent alternative. Silver has several unique features that make it an attractive investment. Silver is considerably more affordable than gold. It also has the potential to significantly outperform gold during a bull run.
Many investors choose to invest in physical silver by purchasing silver bullion or silver coins. Both bullion and coins are effective ways of purchasing silver. Both are widely recognized, highly liquid, and easy to trade.
Silver bars are best suited to investors who are looking to purchase large quantities of the metal at competitive prices and store it in an LBMA approved vault. Coins are best suited to investors looking to buy small quantities of the metal, especially those who want to take delivery of their coins outside of LBMA vaulting facilities.
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