Is Silver a Good Investment? Key Things to Know Before Buying
Silver enjoys a unique position as a rare metal with both physical investment appeal and substantial manufacturing applications. It occupies a middle ground between gold and more traditional financial instruments such as shares or term deposits with distinctive properties.
Australian precious metal speculators should therefore ask: does silver fit the role you are looking to allocate it to in your financial plan rather than: can silver increase in value?
Why People Consider Investing in Silver
In many respects silver is preferable over gold, and shares or cash. The physical form represents true ownership as opposed to a derivative product, such as a share and you’re not relying on a particular financial institution for its safekeeping either.
Furthermore, each ounce of silver is cheaper than gold. This affordability factor therefore provides scope for building up a precious metals portfolio on a more gradual scale as opposed to a single substantial purchase.
Diversification is another attractive attribute of silver. Metals are sometimes regarded as a safe haven in times of financial uncertainty in comparison to shares, property and other forms of investment. While not a guarantee, diversification appeal adds to silver’s attraction in this respect.
Silver Is Not the Same as Gold
In many ways, gold and silver are similar – but this overlooks their important differences. Gold is typically demanded for reasons of investment, jewellery and reserve holdings.
While silver also has investment interest and jewellery applications, industrial usage is far more prevalent. Electronics, electrical components, solar technology and other sophisticated manufacturing activities all use silver.
Industrial demand and therefore supply fluctuations impact the metal’s price trajectory, which can have implications during periods of both rising and falling precious metals markets. A volatile is silver a good investment should therefore be evaluated on its ability to withstand market fluctuations rather than potential for substantial increase in price alone.
Physical Silver Comes With Buying and Selling Costs
The spot price of silver in isolation does not represent the whole picture when it comes to purchasing and selling bullion. Bullion dealers charge a margin above the metal price for their product, this is most commonly known as the premium.
When it comes to offloading bullion, the amount on offer will often fall short of the advertised price. Such transaction costs need to be overcome by increases in precious metal prices in order to post a profit.
Understanding the following areas becomes increasingly important when you decide to buy physical silver:
- The metal premium payable
- Dealer resale or buyback strategy
- Storage and insurance implications
- Resale potential of the product in question
While the fundamentals of silver price appreciation apply to all forms of bullion, generic bullion coins or bars from recognised refiners or mints are easier to identify and deal with than niche offerings.
Bullion and Silver Jewellery Should Be Viewed Differently
In virtually all cases, silver bullion is purchased primarily for the intrinsic metal value inherent in the product. Investment jewellery carries several other complicating factors which impact on price and resale potential, namely: its overall composition and retail appeal.
A sterling silver bracelet, for example, contains approximately 92.5% silver, compared to potentially higher bullion content when it comes to silver bars or sovereigns.
This difference is particularly pertinent when it comes to determining resale value. A jewellery item with an appreciable retail price may fail to realise its full potential at a secondary market dealer. Someone looking to purchase this item purely for the metal it contains would be more concerned with its intrinsic value.
The same principles apply to any unwanted silver items, where comparable quotes from established precious metals trading organisations – such as gold buyers Sydney – can indicate what genuine bullion content value the metals in these items actually represent.
Storage Deserves More Attention Than Many Buyers Give It
Silver is significantly bulkier than gold for comparative monetary value, necessitating alternative storage considerations if the value of the metals you own reaches a certain level. Options include domestic safe storage, bank safe deposit facilities or bullion-specific storage facilities.
Bars appear to be more space efficient than packaged coin collections when it comes to precious metal storage but the latter does offer greater flexibility if you intend selling smaller amounts in the future.
Likewise, coin condition can be more critical than bar appearance in respect of resale value. Standard investment bars carry comparatively less prestige than numismatic or limited edition coins and so physical damage, such as scratching, may impact on subsequent resale potential.
It therefore becomes increasingly important to evaluate whether you are buying silver for its bullion value or jewellery or collectables content.
Silver Does Not Produce Income
One of the key disadvantages of a physical metals investment is the inability to earn interest or dividends on the metal itself. Income generation from silver investments is limited to potential gains on the market price movement in the precious metals sector.
The opportunity cost associated with allocating funds into silver that could otherwise be earning interest or dividends elsewhere should therefore be taken into account when you purchase a physical bullion investment.
Income considerations shouldn’t necessarily put you off entirely when buying or selling silver. It simply means that your strategy needs to be adjusted to reflect this factor, especially if you’re looking to invest in silver as a safe haven investment alternative.
Timing Can Be Difficult
There are few things that move in the same way as precious metals during a period of economic uncertainty. Shifts in interest rates, inflation, exchange rates and investor sentiment around the world combine to move silver prices by a far greater margin at certain times.
It is a very hard exercise to try and buy silver at the bottom of a metals market or sell it at the top of a metals market.
Rather than waiting for the perfect entry point for your silver investment, some people choose to make a series of smaller investments over a regular period as a means of minimising exposure risk. This will not always produce consistent results, it is simply a matter of establishing how you want to invest your discretionary funds in order to produce the financial outcomes you desire.
Liquidity Should Be Considered Before Buying
While there are a range of outlets to buy and sell silver through bullion dealers and precious metals buyers, not all silver investments are created equal. Recognisable bars and coins with clear and specific weight and purity statements will generally be able to fetch a price. Unmarked silver, damaged jewellery or other items may need to be tested before any price quotation.
Keeping your receipts and packaging will also assist if you ever need to identify what silver you are trying to sell, particularly in relation to investment silver. Likewise, knowing how to sell a particular item before you purchase it will avoid a potentially painful learning curve when it comes time to sell it again.
Where Silver Can Fit in an Investment Strategy
Silver can make great sense to a buyer looking for true physical ownership and a different risk profile to standard investments, so long as you understand what your personal parameters actually are before you start buying silver investment products. Silver is certainly not without its challenges in this regard, including:
- The cost of precious metals premiums
- Volatility in precious metals prices
- Storage and insurance considerations
- The ability to sell a physical silver item
Understanding these issues as much as the daily spot price of silver is essential before deciding on what kind of silver investment you desire.
