Gold News

The Devil's Metal? 5 Key Points for Investing in Silver

All you ever wanted to know, and more...
 
PEOPLE often call silver "the poor man's gold" writes Adrian Ash at BullionVault...
 
...and the grey metal often does move in the shadow of its shiny, useless yellow cousin.
 
But when it comes to volatility, silver outpaces gold every time.
 
So it's also known as "Gold on steroids..." if not "Gold on crack..."
 
...the Devil's Metal in fact.
 
So did last week's 15% plunge in prices offer a hellish bargain? Whose tune does it dance to anyway?
 
Chart of weekly price moves in silver vs. gold. Source: St.Louis Fed via London benchmarks
 
Thanks to this year's remarkable swings, interest in silver investing has never grown so strong.
 
Over the 7 days to midnight Monday, demand to buy silver on BullionVault beat gold's by 35%.
 
Selling was also greater, beating gold by 47% in cash terms.
 
Net-net that saw BullionVault users as a group put $12.5m into silver since Monday morning last week, versus $10.9m for gold.
 
This is new. The world's largest single provider of allocated bullion to private investors, we have never seen demand for the more industrial metal beat its 'safe haven' cousin like this.
 
But it does in fact extend a surge starting in summer last year...
 
...with the total value of BullionVault clients' silver holdings (as proven on the Daily Audit) rising 110% from Sept 2019 (now $785m) against 67% growth in gold ($2.7bn).
 
What is driving this surge in private-investor demand and short-term trading?
 
A friend last week asked for a quick primer on the Devil's Metal. Here's the 5 key points I suggested he consider.
 

#1. Silver supply and demand

Silver, like gold, was used as money for thousands of years until the 20th Century. Since then their main uses have diverged.
 
Silver now has zero central-bank demand, while 12% of global gold demand has come for monetary reserves over the last decade. Instead it finds nearly 60% of annual end-use from industry, compared to less than 10% in gold, the rest being made up by jewellery and investment.
 
Their supply profiles also differ. Two-thirds of silver mining production is a by-product of digging for other other metals, notably gold or copper. Silver scrap comes mostly from spent industrial uses and accounts for 18% of annual supply, while recycled gold comes mostly from jewellery and accounts for 41%.
 
Added together, this means silver's total supply to the market can't respond as directly as gold's to changes in its price. But to be clear, there's nothing like a 'shortage' in either metal. Stockpiles of market-ready bars are plentiful.
 

#2. The Gold/Silver Ratio

When we compare their two prices (aka the Gold/Silver Ratio) we see that the cheaper precious metal has steadily lost relative value...
 
...with gold rising from 15:1 in the medieval period to 50:1 in the 20th Century and now 65:1 on average since the Millennium.
 
Here's what the last century looks like on an annual average basis.
 
Chart of Gold/Silver Ratio, last 100-odd years. Source: BullionVault
 
Note that gold, unlike silver, had a fixed price in Dollar terms until 1971.
 
So the Gold/Silver Ratio jumped as silver crashed in the Great Depression of the 1930s...
 
...only to swing back down as gold lost purchasing power along with the Dollar until its release 3 decades later when 'Tricky Dicky' Nixon abandoned metal-backed money at last.
 
On a daily basis, current prices put one ounce of gold at 80 times one ounce of silver. While that extends the underlying trend, many people trading and starting to invest in silver today think it looks under-valued against its longer-term average.
 
It certainly looked cheap on March's crash, when – on a daily basis – the Gold/Silver Ratio shot to all-time record highs above 125.
 

#3. Silver volatility 80% greater than gold's

Despite their fundamental differences, gold and silver prices still tend to move in the same direction.
 
Over the last 50 years in fact, silver prices have moved in the same direction as gold 76.1% of the time day-to-day, and 75.0% of the time on a 12-month view.
 
So the same forces which drive investment money into (or out of) gold tend to move silver prices too, most especially the real rate of interest offered by cash or bonds...
 
...because when money itself is losing purchasing power to inflation, people turn to physical precious metals as a way of storing value used throughout history and across all cultures.
 
The big difference lies in volatility, because when gold rises or falls by 1.0%, silver has averaged a gain or loss of 1.8%.
 
That makes silver's price charts look far more erratic, suddenly plunging or jumping seemingly without warning. That's why silver is known as the Devil's Metal among hedge funds and other speculative traders, especially those betting on its direction with leveraged futures or options contracts.
 
Last week, for instance, marked gold's 3rd steepest weekly plunge of the last 5 years. But silver fell almost 3 times as hard in percentage terms.
 
Roll back to the Covid Crash of Feb-March in financial markets, and silver bullion sank 39.1% inside 4 weeks. The summer's collapse in real interest rates then saw it spike 65.8% higher in the 4 weeks ending 6th August.
 
Why anyone would think they need to "leverage" these moves by betting on silver through futures, options or CFDs is beyond me.
 
But so too is why anyone would buy silver coins or small bars – with up to 20% VAT sales tax added to their costs in Europe – plus dreadful 10% spreads between dealers' buy and sell quotes.
 
There is a cheaper, safer and easier way to buy silver for investment. It makes owning and selling it for full value just as cheap, instant and simple as well.
 

#4. 2020 Bull Market in Context

Like gold, silver enjoyed decade-long bull markets ahead of its big 1980 and 2011 spikes.
 
Inflation was the main driver first time, financial crisis the next. But speculation if not a full-blown mania drove the very peaks.
 
You can see where silver went vertical and touched $50 per ounce not once but twice on this chart.
 
Chart of silver vs. gold price in US$/oz, daily since 1968. Source: BullionVault
 
Until this spring's sudden and stunning rebound from the Covid Crash, what silver lacked over the decade since 2011 was a new and compelling narrative for investment flows.
 
A return to some kind of metal-backed currency system was widely discussed as the 1970s' long inflationary crisis peaked (the US had abandoned the Gold Standard only in 1971 remember).
 
Buoyed by inflation fears once more when the early 2000s' banking crisis spurred zero interest rates and outright QE money creation by central banks, silver's crucial role in photo-voltaic cells then gained mass coverage in late 2010, led by Beijing's plans to cover China with solar panels as part of its post-financial crisis stimulus.
 
Here in 2020, and with central banks abandoning any pretence of ever wanting to curb inflation again, governments everywhere are hoping new infrastructure spending could accelerate their national recovery from Covid's economic crash. Leading those plans (and again following China's example) is 5G technology, where the massive rollout of base stations, additional data storage and new 5G-enabled devices is certain to boost the electrical and electronics sectors' demand for silver.
 
Bottom line? Gold's timeless use as the ultimate store of value shines out amid 2020's rolling crises. Today's unprecedented central-bank and government stimulus put a spotlight on silver's stronger industrial use and its potential as a high-octane inflation play.
 
That's provided, of course, that industrial growth and inflation can be conjured up by the wizards of central banking. They're using such desperate magic because they really do fear that they can't. But succeed or fail, they're very likely to conjure up fresh chaos from the Devil's Metal one way or the other.
 

#5. How to buy investment silver

First, put down that crack-pipe and forget all about futures, options, CFDs or going loco with any other speculative derivatives. Choose instead from the same 3 ways as you would for gold.
 
* Coins and small bars *
Popular in silver because you get a lot for your money. Or so it might feel when the postman arrives. Hence the 'stacking' phenomenon in the US, with YouTube full of unboxing videos. But thanks to those terrible dealing spreads, you should expect to lose 10% minimum between buy-sell prices. And because silver is primarily an industrial metal today, many countries then force you to pay some kind of sales tax on top.
 
What does this mean for your potential returns?
  • In US Dollar terms, wholesale silver (aka 'spot') has risen 35% so far in 2020. But buying silver Eagles at New Year to sell today would net only 25% for a US resident.
  • Euro investors face sales tax on top, and even with Germany cutting its MwSt sales tax from 19% to 16% at present (to try and boost consumer spending), the wide dealing spreads on retail-investment silver products means you would need prices to rise 22% or more just to get back to breakeven after purchasing a 500g, 1 kilo or even 15kg bullion bar today.
  • Things get worse still for a UK resident. Since mid-2019, the wholesale spot price today shows a 58% gain today. But if you'd bought £5,000 of silver Britannia coins last June, then on your outlay of £18 per coin, you would make only 92 pence – a mere 5% profit – thanks to the 20% VAT you had to pay on top of the dealer's mark-up, plus the discount you suffer now you want to sell.
Add it together, and silver coins or small bars really don't qualify as an 'investment', let alone a way of defending your savings. Then think about storage and insurance and liquidity. Is no-one really going to steal your 1,000-ounce silver bar door-stop? Not at $24,000 in melt value? And how will you sell quickly and easily when the time comes?
 
* Silver-backed ETFs *
Carrying no VAT, exchange-traded trust funds work like a share on the stock market. The giant iShares Silver Trust (NYSEArca: SLV) dominates in the US, while WisdomTree's physical silver ETF (LON: PHAG) is the most popular in Europe. Trading will cost you whatever your stockbroker charges to deal, plus ongoing fees of 0.50% per year on the SLV or 0.49% on the PHAG (taken out of the silver backing the value of your shares, so that – all other things equal – their price slowly ticks lower each day).
 
Of course, you can trade silver ETPs only during stock-market hours. And you get no actual ownership (your own shares in a trust, not any metal. So you need to judge the credit-worthiness of the ), no choice of location (think about geopolitical risks, possible exchange controls) and no instant settlement. Instead you'll have to wait 2 days for the shares to settle, no doubt into your broker's nominee account, where your legal title will be distanced still further from any metal.
 
Oh, the metal backing the value of your shares may or may not be insured. (SLV shareholders, warns the prospectus, "cannot be assured that the Custodian maintains adequate insurance or any insurance with respect to the silver held by the Custodian on behalf of the Trust.") For reassurance, a sample of those bars might also be inspected once or twice a year. ( PHAG's inspections check 1 bar in every 25.)
 
* Vaulted bullion *
Direct ownership of wholesale silver from 1 gram at a time. Tight spreads (name your price in fact), instant settlement with 24/7 trading (or 2-day settlement at the global benchmark price if you prefer), choice of 4 locations (London and Zurich most popular), maximum 0.5% commission to buy or sell, specialist high-security storage with full insurance for 0.48% per year (monthly $8 minimum),  daily proof your property is where it should be in full, plus annual inspections of each and every bar by independent experts. Deal online or by smartphone. No VAT (not unless you choose to withdraw your silver from the vault.)
 
Well, that's what physical silver investing's No.1 provides at least. Other services are available. Be sure to shop around. Then come back to BullionVault once you've checked everything out for yourself. And good luck whatever you choose once you're ready to dance.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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