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Personal finance - Investing in Silver

Silver is an interesting commodity to invest in since you can hold much more of it than you can gold due to its lower price. Indeed it is often called poor man’s gold due to the price being some one sixtieth of the price of its yellow big brother. Yet investing in silver may be a good move. It is more volatile than gold when it comes to its price movements. That is to say if gold makes a two per cent move in a day, then silver can easily move by four per cent in the same time period. Gold has moved from about $350 to $1900 at its peak, only to fall back to current levels around the $1350 to $1400 mark. Silver reached a peak of $50 from a low of around $10 and has since slipped back to the $22 to $23 mark. At less than half its highest valuation silver therefore is substantially more off its peak than gold is, but of note is that at the time the two metals moved into top gear silver rocketed higher whereas gold just made some, albeit, large strides to its high.

Silver has been considered a precious metal and traded as a store of value for thousands of years. It has been the basis of many monetary systems and its value was considered for a very long time second only to the value of gold. It was coined to produce money around 700BCE and there are still monetary systems today named after the precious metal, including most notably the UKs Pound Sterling, which reflects the fact the pound originally represented the value of one pound tower weight of sterling silver.

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Silver was valued very highly until large deposits were discovered in the nineteenth century. Fearing a rapid devaluation of the metal, silver become less trusted as a basis for currency and gold was adopted more widely, especially since 1900. Of course currently fiat money rules the world and there are no currencies backed by either of the precious metals. Yet silver still retains value based on its relative scarcity and usefulness in electronics, photography and medical devices. It is the most electrically conductive metal of all, but is seldom used because of its expense compared to copper, which is substantially less expensive and still a good conductor. In war times when there was a copper shortage, silver was released by various governments to ensure that electrical projects could be completed. The silver was reclaimed after the wartime years.

You can buy silver directly from jewelry shops and even some goldsmiths in Thailand. Sterling silver is the world standard, (remember its part of the name of the UK currency) and this is 92.5% pure with 7.5% copper to ensure the metal is more hardwearing. It will normally be hallmarked with a 925 stamp. In the U.S. the minimum purity is 90% and this minimum will be hallmarked with 900 to signify that percentage. White gold also contains a great deal of silver. Nine-Carat white gold is 62.5% silver and 37.5% gold. Britannia silver is 95.8% pure whilst 99.9% pure silver is used in bullion production. Investment grade silver is marked with 999 hallmarks to signify its extra purity. Many countries mint silver coins and bullion bars for investment.

Price correlation

Look to pay high spreads for silver though, since the price is quite volatile, and traders need the margins to hedge against adverse moves in price. Another way to invest in silver is to use electronically traded funds (ETF’s) or spread betters. These are similar instruments as are used for gold investing. With ETFs you can usually buy on margin meaning you don’t have to pay the full price of the silver at the outset, but only typically between ten percent to twenty-five percent of the price. If the price moves down significantly you may be asked for extra deposit – this is known as a margin call. It does mean that you can own a lot more silver than you could otherwise afford if buying outright. Market spreads and brokers fees usually are within one percent of the spot price. With spread betting you can also “own” a great deal of silver for a small deposit without paying for the entire amount. Often deposits can be as low as just one or two percent. Of course your position can be wiped out with a one or two percent move so it is wise to make a higher deposit to withstand any volatility. The temptation is to buy or sell a lot more silver than you might otherwise be able to even using margined ETFs. However one good thing about spread betting silver is that you can take on a short position and profit from a fall in price of the precious metal as well as go long and profit from price rises. The method is similar and the deposits are also similar. Going short with an ETF is much more difficult.

It is worth being aware of the correlation of silver and gold prices moving in tandem with each other. Rarely will one move without the other, but gold and silver markets are distinct and if there is more movement in one market as compared to the other this will reflect buying or selling of the distinct commodities in their own right. Usually though, silver will provide a more pronounced move than gold, except on those occasions when there is central banks or other transactions that can move gold in surprise moves.

Silver has more or less doubled in price against its pre run-up prices which were traditionally in the $9 to $11 per ounce price range. At current levels of $23 per ounce the market could be poised to stay sideways for quite a while, fending off speculation on the upside whilst providing investors with a stable holding against inflation. Asset classes are always US dollar sensitive since their base price is in US dollars. You can buy and sell silver in other currencies, in which case you will be taking a position in the currency that you have chosen as much as you will have the underlying price of the metal itself.

For those looking to hold silver for many years, then silver jewelry or silver bullion may present itself as a good way to use silver as a hedge over the long term.