Investing in Silver 101: How To Begin Investing in Silver
One ounce Johnson Matthey silver bars
I get people asking me about precious metals every now and then – I’ve noticed a lot more commercials advertising precious metals investing, shysters opening up “We Buy Gold!” shops and a lot of people concerned with the way the economy seems to be going.
There are some similarities between the worlds of silver and gold and some differences, so some of the things I’ll say about silver apply for gold. Honestly, I know a lot more about silver than I do about gold and I believe it’s more accessible to the average person. I will go into why I prefer silver later on…
I don’t have a bunch of dates and historical facts for you, but I can tell you that silver has been used as a medium of exchange (i.e. “money”) for thousands of years, at least as far back as ancient Greece and eventually throughout the world. I can also tell you why silver has historically been used as money. The value of the silver money was based on the intrinsic worth of the silver. The intrinsic value of the silver came from the metal’s practical and aesthetic qualities as well as it’s rarity – you can’t just go pick silver off trees. People wanted silver to do a lot of cool stuff with, but there was only so much silver out there so basically the high demand and relatively low supply made a little bit worth something, so you can carry a respectable amount of wealth in a small piece of silver. Silver is also very durable and doesn’t degrade over the course of your lifetime (ok, no nit-picking on this, chemists). The portability plus the durability made it a perfect choice for coinage and trade.
As the civilizations began to trade with each other, silver (and other metals) facilitated this international trade. When a trader dealt with a merchant from a different civilization, they could agree on pricing because both parties knew what metals were worth. It didn’t really matter which despot was stamped on the coins, the silver content was the important thing. Trade in precious metals carried on until approximately the middle part of the 20th Century (the US abandoned silver currency in 1965) – someone in Great Britain trading with someone in the Netherlands could understand the price in Dutch guilder based on the silver content of the guilder compared to the silver in the pound.
Currently silver is not officially traded as a currency, although some governments do issue silver coins which are technically currency. Approximately half of the world’s silver demand comes from industrial uses. Silver has the highest thermal conductivity and electric conductivity out of all the metals, making it very useful for many electronic and high-tech items. Your cellphone probably has a tiny bit of silver in it. So does your computer. Photography film used to make up about a third of the annual silver usage, but that has been shrinking due to people not using film often anymore and opting for digital. On the other hand, the increase in digital cameras leads to an increase in demand for silver in the way of electronics.
Another portion of the silver supply is used for things like jewelry and silverware. Just like our distant ancestors, we still find the metal nice to make pretty things with.
Another portion of the supply is used for medical and dental applications, such as fillings, surgical tools, bandages and even some medicines. Some of this is beyond me, so I’ll just post the Wiki link here if you want to read more on the medical/dental uses of silver. It is kind of neat to hear about the different properties it has.
What’s left is used for investment purposes.
WHY INVEST IN SILVER?
People invest in silver largely as a hedge against inflation and see it as a way to preserve wealth (think of it as freezing your money as it’s worth today). Governments can print money, but they can’t magically come up with the silver to correspond to the money supply. As everything else goes up, silver will theoretically go up in proportion to the money supply. In reality, silver isn’t inherently any more special than any other commodity, but the fact that it’s durable, easily transferable and portable make it a better option than other commodities. For example, today (8/21/12) about three ounces of silver is worth one barrel of oil. One ounce of silver is worth about three bushels of corn or wheat (give or take a little). Which would you rather keep around? You can take those couple ounces of silver, put them somewhere and they’re not going to take up hardly any space and they won’t require any special care or consideration.
Some people invest in silver because they believe it has the potential for a true upside – not just reflecting inflation, but an increase in demand and/or a decrease in supply. Many of the uses of silver previously mentioned lead to small amounts of silver being basically thrown away each year, eating away at the world’s total supply of silver. Some suggest that “peak silver” is rapidly approaching, a situation where there’s severe shortages of silver in the world which will make the price of existing silver go up.
Here’s a video on the concept of peak silver:
Many people keep silver around because of lack of faith in currencies. In the event of a currency collapse, the silver would be used for barter or exchange for new currency. Governments rise and fall and paper currencies go with them. I’d rather have a tiny silver coin from the Ottoman Empire right now than a slip of paper with any promise from the Ottoman Sultan right now. If you think governments are permanent fixtures, check this video out and think of all the currencies that have probably come and gone in Europe:
HOW IS SILVER PRICED?
The “spot price” of silver can be found by checking commodity markets. I prefer Kitko to track prices. This price is more or less the absolute base price of silver throughout the world. It isn’t the price you should expect to pay, because this price reflects how much the largest buyers are paying for the metal in it’s raw state. It passes through a few middlemen who put energy into it and take a profit along the way. Normally you’ll pay a couple bucks over spot per ounce at the low end.
The price comes from basic supply and demand. When industrial or investment demand is up, the price goes up. When it’s down, the price goes down. It’s also important to note that the prices reflect currency rates as well. Right now the US dollar is relatively strong, making silver a little cheaper than it would be if the dollar was weak.
Silver is also very energy-intensive to mine and the cost reflects the effort put into it. If energy prices go up and silver becomes harder to extract (i.e. we’ve already gotten all the easy stuff and have to dig a little deeper), that will reflect in the price. Here’s a video that shows some of the effort that goes into mining silver:
Ok, now on the good parts –
HOW TO INVEST IN SILVER
Some people invest in silver by buying exchange traded funds (ETFs) or other financial instruments. There are good reasons to do this and good reasons not to, but I’ll focus on physical metals here.
Many people purchase 1 ounce bullion coins or bars. These can be government minted or privately minted. Examples of government minted ones are the US silver eagles, the Canadian maple leaf, the Chinese Panda and the Australian Koala. These are usually given some sort of currency denomination that doesn’t come close to reflecting the value of the silver, i.e. the US eagle is worth one dollar and the price of silver is around $28 today. Privately minted coins have no face value and can sometimes be had for a lower mark-up above spot than the government minted ones. This largely depends on the numismatic value (basically the appearance) of the coin. I’ll show an example here – the coin on the left is really sweet, the one in the middle is ok and the one on the right is really lame. They’re all worth the same in silver, but sometimes people are willing to pay a little more for a better coin.
The USS Constitution with “Honest Value Never Fails”, an Indian head and Santa Claus with “Merry Christmas 2001”. No offense to Santa, but that coin is pretty lame.
Canadian Maple Leafs. I put up an article recommending these here.
The US silver Eagle.
As far as where to buy your metals, there are many dealers out there. Some good, some bad, some somewhere in between. It doesn’t hurt to shop around a bit. I have my preferences and if anyone asks I’ll gladly share, but I’m not going to post “buy from <dealer>!” here.
Another option is pre-1965 silver US coins also known as “junk silver’ Typically these coins have a 90% silver content, but that’s not always the case. It’s good to check a site like Coinflation to find out the silver content of coins by year and denomination. Usually you’ll end up paying somewhere near the spot price for one ounce of silver for $1 in junk silver. These coins are a good idea for buying in very small increments and to keep around as potential barter currency. Right now you can buy a single silver dime for somewhere in the neighborhood of $3. If you don’t have much to spare, that’s a good way to start building up silver. You can find these at your local coin shop or eBay.
Various pre-65 US silver coins or “junk silver”.
Some people also purchase large 100 ounce bars of silver. You get a discount on the markup for these because there’s less input into them and you’re buying in bulk but on the downside they’re not easily divisible. If you want to sell some silver, you pretty much have to sell the whole thing unless you’re going to find a way to cut it.
SILVER FOR BARTER
Hey, people have been exchange silver for a lot longer than you or I have been on this earth. Who’s to say it can’t happen again? One thing that is cool about silver is that you can get small denominations (i.e. silver dimes) to make small transactions. In a post about copper for barter, I said that my gut feeling is that the copper in one AOCS round would probably be worth a few tomatoes, a squash or something like that in an agrarian barter economy. I’d say that a silver dime would probably have the value of a basket of grain, a small bag of apples, a good sized mug of beer or maybe a dozen eggs in a barter economy. My gut feeling on an ounce of silver is that it would be worth some kind of handcraft, like a good basket, some kind of pottery, a decent knife or a few chickens. Remember, currencies are not permanent arrangements. It’s just something to consider
As a slight aside on the subject of acquiring silver for a barter currency later down the road, I think it makes more sense to try to acquire whatever it is you feel you’ll be barter for later now instead of during a period of calamity. It’s much easier to walk into Menard’s and buy some tools with cash today than it probably will be to track specific items down and pay with silver should things go south in the economy.
SILVER VS. GOLD
Both have their place in the investment world, but I feel that silver is a little more accessible to the average person than gold. You can get an ounce of silver for about $30 today and an ounce of gold for a little over $1600. There are denominations smaller than an ounce for gold (i.e. French 20 franc coins) but it’s more realistic that someone is going to want to pick up a few ounces of silver over a tiny sliver of gold. Silver is also a little easier to break down into small denominations. If I had 100 ounces of silver and wanted to sell 20 of them to pay for something, that’s easier than if I had two ounces of gold and wanted to sell/barter half an ounce.
Gold is also almost entirely an investment metal. Silver is as much of an industrial metal as it is an investment, so the supply/demand factors are different.
HOW MUCH SILVER SHOULD I HAVE?
Sorry to give a vague answer, but whatever you’re comfortable with. At the extreme, some will say that you should have everything in precious metals and some will say steer clear entirely. Many people suggest somewhere between 5-25% of your net worth in metals. Instead of worrying about percentages and amounts, I guess I’d just suggest learning a little bit about the financial system, precious metals and how the market works (hey, you’re doing all of that now!) and start making a plan to put something into silver, whether or not it’s a dime here or there or several hundred ounces at once. Maybe make a point to pick up a few ounces with whatever is left at the end of the month – you know your finances better than I do.
Silver is probably the most user-friendly investment you can make and there’s really no minimum entrance costs. You can start today by picking up a single silver dime for a few bucks on eBay. You don’t have to fill out any paperwork, you don’t have to set up an account, you don’t have to screw around with the guy at Edward Jones or the HR lady that deals with your 401k and you also don’t have to notify the government. It’s very easy to do. It’s not the end-all-be-all of the financial world, but it’s something worth considering. Also, there’s something about being able to hold something with true, lasting intrinsic value in your hand that your grandparents and distant ancestors would have recognized as something with value.