Although we always advocate investing into physical silver bullion, some investors prefer the lower transactional costs of non-physical silver investments. These investments, often known as “paper” silver, are more commonly used for speculation or short-term trading. Below you can learn about the various investment vehicles available, as well as the pros and cons of each.
Silver ETFs
An ETF (exchange-traded fund) is similar to open-ended mutual funds, but instead of being traded directly from a company, ETFs are traded live on secondary markets, meaning investors don’t interact with the company that manages the ETF. All the transactions related to an investor’s ETF are performed over the exchange between second party investors. ETFs are only traded during stock exchange operating hours, similar to how stocks are bought and sold. ETFs allow great flexibility because of their varied structures – they could be comprised of gold, silver, paper currency, securities, or domestic stocks such as those traded on the NYSE or the S&P 500 Index.
Today, with the advent of gold and silver ETFs, investors can make use of trading these precious metal commodities much like trading individual stocks—with a lot less risk. These gold and silver ETFs normally have lower fees, long and short-term ownership, the value of ready liquidity, and offer a tax break as investors are only taxed on capital gains from gold and silver ETFs—not the sale amount. Because of the rapidly changing market prices of precious metals, gold and silver ETFs have a feature known as “call” and “put” options. Investors are afforded the option to buy shares of either gold or silver up until the time expires, but they are not “obligated” to buy them. The same goes for a put option—the investor is not obligated to sell their shares before the offer time expires.
This is a great advantage. Gold and silver prices will change quickly throughout the trading day and this price fluctuation can vary greatly. A call option can rise in price once the gold or silver rises and the put option can also drop with the market price. This call and put option protects investors within a volatile precious metals market. Call and put options do have an expiration date, but they are normally extended periods such as weeks and months. These gold and silver EFTs open up a way for investors and traders to increase their wealth with relatively low-risk and promising high-yield trading. The call and put option adds to this convenience by allowing investors and traders the ability to “play” the precious metal market in relation to the at the moment price of gold and silver.
Gold and silver EFTS were introduced in the beginning of 2000 and provided an appealing way to invest in gold and silver. Both individual and institutional investors are taking advantage of the liquidity and quick moving precious metal price changes to earn money for their financial portfolios. Silver is especially revered as a hedge against the failing economy and having physical assets along with silver-based EFTs is an excellent way to protect any investor’s hard-earned money. Both gold and silver EFTs have the same benefits although silver is less costly as an investment and more shares can be bought. While gold yields a more robust return in a shorter time, silver bought slow and steady makes for a safer EFT investment.
Silver Futures
A futures market is one where an auction market is established that includes buying and selling of a commodity or future contract for goods to be delivered at a future date. These raucous and excited transactions are done within a trading pit where representatives for investment firms carry out trading for certain goods.
A commodity futures contract is the agreed upon contract containing the share price and quantity of a particular commodity that is “fixed” at the time the agreement is sealed. These contacts are typically considered fulfilled once the goods are delivered. At times, a futures contract may be fulfilled by a cash value instead of the actual goods agreed upon, but most of these contracts are liquidated prior to the expected delivery date. These contracts allow an investor to buy or sell a certain commodity at a set price by a certain date in the future.
Commodity based futures contracts can only be administered and traded by investors or investment firms that are registered with the CFTC, the Commodity Futures Trading Commission. The CFTC was established by the United States Congress in 1974 as an independent agency and monitors registered investors and firms to be sure they are complying with internal controls and sales practices that meet particular guidelines. The mission of the CFTC is to deter administrators of future trade contracts from being fraudulent or from manipulating or using dishonest practices when dealing with market users and the public.
Individual investment counselors or businesses that offer trading advice or assist in customer’s funds for future trading contracts must be registered with the HFA, the National Futures Association. The NFA is an organization approved by the CFTC and considered a self-regulatory group. They develop regulations and programs to create a safe futures market industry and offer services and education to assist investors and ensure their members are meeting responsibilities associated with being investment counselors in the NFA.
A futures contact for precious metals such as gold and silver results in the delivery of these commodities and the contracts include specifics pertaining to the quantity, quality, and place the gold or silver will be delivered. Gold future contracts are valued in dollars and cents per ounce. If gold was trading for $558 an ounce, 100 ounces would be worth $55,800 dollars. The gold market has a wide range, but the minimum price movement must be at least $0.10 cents. This is called the “tick size.” Gold future contracts are most active during February, April, June, August, October, and December. Exchanges set limits on the amount of gold future contracts a single trader can hold during this busy times.
Silver future contracts are also valued in dollars and cents like gold, but the tick size is $0.001 per ounce. Silver future contracts also has position limits set by the exchanges during the silver future contracts busiest months in March, May, July, September and December.
Trading in the futures market can be very risky and if not well educated, an investor can lose money on what they put into the future contract. Done the right way, precious metals futures contracts can be safe and profitable.
Silver Mining Stocks
Mining stocks are publicly traded stocks of companies that partake in the mining industry. Mining stocks are not limited to the process of mining only, but includes companies that are involved in just about any aspect of mining or mineral acquisition and production. The better known mining stocks are for companies that produce gold and silver and other precious metals like platinum and copper. Other mining stocks can be vested in companies that work with ores or minerals such as iron, aluminum, tin, lead, mercury, coal, rock phosphate, sulfur, salt, or gypsum.
Mines include quarries that also produce stone. Stone produced for commercial use such as marble and granite are highly sought after for construction of decorative and high quality structural uses. Other types of stone mined in quarries include limestone, shale, and sandstone. These stone products are used for floor tiles, counter tops, support columns, wall coverings, and at times, an entire building or home can be built from stone. The companies involved in these mining roles are publicly held and traded as mining stocks. Several companies that mine and produce precious gems are also considered mining stocks. They are normally stable and don’t pose a high risk or quick profit.
The price of mining shares for companies that produce precious metals are more apt to change quickly as the precious metal market prices change each day, several times a day. Gold and silver mining stocks are the most popular and the most ferociously traded mining stocks. Much of the gold and silver mining stocks affect the gold and silver stock market prices around the world, making these trades some of the most watched and most important trades from the start to the close of each trading day.
Mining stocks are normally volatile and they can be erratic. If a company happens to find an unknown, rich deposit of a precious metal like gold or an ore like iron, the stock price of that company can quickly jump in value. If a company that mines silver, which had a promising resource, suddenly announces its prospective mine was void of silver, the share price will drop swiftly, and investors could unexpectedly lose money. Other factors that can cause drastic losses and gains in mining stock can include a mine closing that lowers one stock, but increases another as a company takes up the slack in production.
Mining stocks are also based on the prospect that a mine has a limit to its resources and so investors must take into consideration the feasibility of that company’s stock. Mining encounters geological challenges that can alter the worth of that mining company’s stock. Mining can be 50% mining and 50% marketing. A geological analysis is required to access the complexity of the gold of silver in the mine and the method needed to extract the precious metal ore. These factors are part of the worth for shares and complex mining issues will affect the stability of the shares.
There are additional factors that go into a feasibility study for mining stocks. The mining cycle, mining rate, dilution, capital costs, and current market prices. Investors should also investigate the company’s balance sheet and past production rates before investing in mining stocks.
Silver on Account
Having a precious metal account is similar to having a certificate of ownership, but precious metal accounts are open to private investors and private companies and maintain their own accounts. The national banks and governments are eliminated, giving the owner of the precious metal accounts complete control. Statements for precious metal accounts are provided for investors and they include the physical characteristics of the bullion, type, weights and assays, and any other identifiable information.
With precious metal certificates, the bank or government agency stores the physical metal and the owner receives proof of their ownership. These precious metal certificates can be risky in the event of a rush on metals, leaving investors with merely a piece of paper. Many of the precious metal certificate accounts require a minimum investment amount of $10,000, leaving smaller or private investors out of the pool.
There are two options for precious metal accounts; allocated and unallocated accounts. With an allocated account, investors own a specific amount of bullion that is stored in the administrator’s storage facility. Storage fees are paid on a regular basis and an upfront fee is charged when the account is first opened. Investors can request delivery of their allocated precious metal at any time. The institution holding the precious metal is required to keep the metal store for each customer safe and it cannot be touched or used in any way.
A precious metal account that is unallocated, allows the holders to use the precious metal at will for their own purpose or need. Each investor’s precious metal store is kept together with everyone else’s metal and it’s considered “pooled.” Each investor owns a portion of the pooled metal. Essentially, the institution providing the precious metal account can do whatever they deem reasonable with the metal.
If other investors demand delivery of their precious metal store and there is a large demand for the metals, a run on metal will occur if the holder does not have enough metal on hand. This is dangerous for other investors. The unallocated precious metal accounts do not require storage fees, but the trade off is a riskier option than having an allocated account.
Advantages of having precious metals on account include confidentiality for the investor, low costs for storage and security, and often, there is no sales tax or other taxes collected on buying and selling. Investors would need to check with the tax laws in their own country or state to be sure they are not usurping any required taxes.
Having a precious metals account provides a way to own precious metals without the need to store it, protect the investment, or be concerned about theft or loss. Precious metals kept on account allow investors to buy and sell at lower fees than having the actual physical bullion on hand. They also avoid shipping fees and can keep track of their inventory easily. Still, the disadvantage to owning precious metals without taking physical possession is the chance of a run on delivery leaving the last investor with no inventory to back up their account statement and the lack of having easily accessed metal on hand.