Silver as an investment
Silver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as a legal tender in all developed countries, although some countries mint bullion and collector coins like the American Silver Eagle with nominal face values. In 2009, the main demand for silver was for industrial applications (40%), jewellery, bullion coins and exchange-traded products. In 2011, the global silver reserves amounted to 530,000 tonnes.
Millions of Canadian Silver Maple Leaf coins and American Silver Eagle are purchased as investments each year. The Silver Maple Leaf is legal tender at $5 per ounce and there are many other silver coins with higher legal tender values, including $20 Canadian silver coins. Silver is legal tender in the U.S. state of Utah, and can be used to pay all debts.
Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand fluctuations between industrial and store of value uses. At times this can cause wide ranging valuations in the market, creating volatility.
Silver often tracks the gold price due to store of value demands, although the ratio can vary. The crustal ratio of silver to gold is 17.5:1. The gold/silver price ratio is often analyzed by traders, investors and buyers. In Roman times, the price ratio was set at 12 or 12.5 to 1. In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1, which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803. The average gold/silver price ratio during the 20th century, however, was 47:1.
Physical bullion, in coins or bars, purchased from a dealer, may have a premium of 20 percent or more. For much of 2015 as well as early 2016, physical silver bullion bars have been available for purchase at a premium of less than 7% over the Comex spot price, while government minted coins still command a much higher premium. The paper or computer prices are not the prices for buying actual silver, in your hands. There will always be a major difference between computer traded pricing, and the real, in your hands buying and selling of silver.
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From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per ozt. for the first time by late April 2006. The monthly average price of silver was $12.61 per troy ounce during April 2006, and the spot price was around $15.78 per troy ounce on November 6, 2007. As of March 2008, it hovered around $20 per troy ounce. However, the price of silver plummeted 58% in October 2008, along with other metals and commodities, due to the effects of the credit crunch. By April 2011, silver had rebounded to reach a 31-year high hitting $49.21 per ounce on April 29, 2011 due to economic concerns about inflation and uncertainty regarding bailouts in the Eurozone. From the year 1840 to 2012 silver has its life time high-price in 1980 on Silver Thursday.
Hunt Brothers (Nelson Bunker Hunt & William Herbert Hunt) attempted to corner the silver market using leverage. Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Nelson Bunker Hunt and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver.
From 1973 the Hunt brothers began cornering the market in silver, helping to cause a spike in January 1980 of the London Silver Fix to $49.45 per troy ounce, silver futures to reach an intraday all-time high of $50.35 per troy ounce and a reduction of the gold/silver ratio down to 1:17.0 (gold also peaked the same day in 1980, at $850 per troy ounce).
In the last nine months of 1979, the brothers were estimated to be holding over 100 million troy ounces of silver and several large silver futures contracts. However, a combination of changed trading rules on the New York Mercantile Exchange (NYMEX) and the intervention of the Federal Reserve put an end to the game. By 1982 the London Silver Fix had collapsed by 90% to $4.90 per troy ounce.
In 1979, the price for silver jumped from about $6 per troy ounce to a record high of $49.45 per troy ounce (on January 18, 1980), which represents an increase of 724%. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). The situation for other prospective purchasers of silver was so dire that the jeweler Tiffany's took out a full page ad in The New York Times, condemning the Hunt Brothers and stating "We think it is unconscionable for anyone to hoard several billion, yes billion, dollars' worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver".
But on January 7, 1980, in response to the Hunts' accumulation, the exchange rules regarding leverage were changed, when COMEX adopted "Silver Rule 7" placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.
There was immense risk to the world economy that investors drove the prices up by buying defensive commodities (e.g. silver or gold). When the short-term risk subsided, investors reallocated their assets back into yielding (dividend or interest) investments such as stocks or bonds.
The 2011 United States debt ceiling crisis was the major factor for the rise in price. The 2010 U.S. midterm elections led to the President Obama vs. Tea Party movement battle. The price of silver steadily rose from $17 to $30 as the elections approached. Then as the split and threats started to materialize between late 2010 and 2011, silver found a "new normal" between $25 and $30.
In 2011, Republicans in Congress demanded deficit reduction as part of raising the debt ceiling. The resulting contention was resolved on 2 August 2011 by the Budget Control Act of 2011.
Then the first few months of 2011, Moody's and S&P downgraded the outlook on US finances. This was a major shock to the financial world; that's when silver climbed to $50. On 5 August 2011, S&P issued the first ever downgrade in the federal government's credit rating, citing their April warnings, the difficulty of bridging the parties and that the resulting agreement fell well short of the hoped-for comprehensive 'grand bargain'. The credit downgrade and debt ceiling debacle contributed to the Dow Jones Industrial Average falling nearly 2,000 points in late July and August. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on August 8.
Then as it became likely that U.S. Secretary of Treasury Timothy Geithner would order the treasury to use extraordinary measures to delay the crisis, silver settled back at $35. As the debacle continued during the summer, silver moved in the range of $33 to $43.
As it became clear that the "financial apocalypse" would be delayed by late summer, people dumped silver commodities and moved back into U.S. equities. The price of silver quickly went back the level of the "new normal" of around $30.
Whether classifying silver's movement as a 'bubble' (seen when comparing silver with gold) has been debatable with Peter Schiff denying that a bubble ever existed.
Influencing factors of Price
Large traders or investors
The silver market is much smaller in value than the gold market. The London gold bullion market turns over 18 times more monetary value than silver. With physical demand estimated at only $15.2 billion per year, it is possible for a large trader or investor to influence the silver price either positively or negatively. For example:
In 1979, The Hunt brothers attempted to corner the silver market and were estimated to have accumulated over 100 million troy ounces of silver causing the price to go from $6 to $48.40/ozt.
In 1997, Warren Buffett purchased 130 million troy ounces (4,000 metric tons) of silver at approximately $4.50 per troy ounce (total value $585 million). On May 6, 2006, Buffett announced to shareholders that his company no longer held any silver.
A big driver for silver sales in 2012 was Morgan Stanley and their short position holdings. This has influenced the silver market, along with an apparent shortage of above ground silver available for investment. As silver continues to boom for industrial uses, less of the metal is available for physical bullion for investment. That, coupled with paper investment uncertainty, has driven the market prices wildly.
In April 2007, Commitments of Traders Report revealed that four or fewer traders held 90% of all short silver futures contracts totalling 245 million troy ounces, which is equivalent to 140 days of production. According to Ted Butler, one of these banks with large silver shorts, JPMorgan Chase, is also the custodian of the SLV silver exchange-traded fund (ETF). Some silver analysts have pointed to a potential conflict of interest, as close scrutiny of Comex documents reveals that ETF shares may be used to "cover" Comex physical metal deliveries. This led analysts to speculate that some stores of silver have multiple claims upon them. On September 25, 2008 the Commodity Futures Trading Commission (CFTC) relented and probed the silver market after persistent complaints of foul play.
In April 2010, Andrew Maguire, a former Goldman Sachs trader, went public with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets, prompting a number of lawsuits. In response to allegations of market manipulation from silver investors such as Max Keiser, Blythe Masters, Head of Global Commodities for JP Morgan, told CNBC in April 2012 "often when customers have metal stored in their facility, they hedge it through JP Morgan on a forward basis who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren’t aware of the underlying client position that we’re hedging then it would suggest inaccurately that we are running a large directional position."
Industrial, commercial, and consumer demand
The traditional use of silver in photographic development has been dropping since 2000 due to the decline of film photography. However, silver is also used in electrical appliances (silver has the lowest resistivity of industrial metals), photovoltaics (one of the highest reflectors of light), RoHS compliant solder, clothing and medical uses (silver has antibacterial properties). Other new applications for silver include RFID tags, wood preservatives, water purification and food hygiene. The Silver Institute have seen a noticeable increase in silver-based biocide products coming onto the market, as they explain:
Currently we’re seeing a surge of applications for silver-based biocides in all areas: industrial, commercial and consumer. New products are being introduced almost daily. Established companies are incorporating silver based products in current lines - clothing, refrigerators, mobile phones, computers, washing machines, vacuum cleaners, keyboards, countertops, furniture handles and more. The newest trend is the use of nano-silver particles to deliver silver ions.
Data from 2010 reveals that a majority of silver is being used for industry (487.4 million ounces), jewelry (167.0 million ounces), and investments (101.3 million ounces). Approximately 500 ounces of silver are used in every Tomahawk (missile).
The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long-term rise in industrial and jewelry usage.
Hedge against financial stress
Silver, like all precious metals, may be used as a hedge against inflation, deflation or devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010:
The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become.
The flat, rectangular shape of silver bars makes them ideal for storage in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer. Silver is traded in the spot market with the code "XAG". When settled in United States Dollars, the code is "XAGUSD".
Various sizes of silver bars:
- 1000 oz troy bars – These bars, 999 fine, weigh about 68.6 pounds avoirdupois (31 kg) and vary about 10% as to weight, as bars range from 900 ozt to about 1,100 ozt (28 to 34 kg). These are COMEX and LBMA good delivery bars.
- 100 oz troy bars – These bars weigh 6.86 pounds (3.11 kg).
- Odd weight retail bars – These bars cost less and generally have a wider spread, due to the extra work it takes to calculate their value and the extra risk due to the lack of a good brand name.
- 1 kilogram bars (32.15 oz troy)
- 10 oz troy bars (311 g) and 1 oz troy bars (31.1 g)
Coins and rounds
Silver coins include the one ounce 99.99% pure Canadian Silver Maple Leaf and the one ounce 99.93% pure American Silver Eagle. Coins may be minted as either fine silver or junk silver, the latter being older coins made of 90% silver. U.S. coins 1964 and older (half dollars, dimes, and quarters) are generally accepted to weigh 24.71 grams of silver per dollar of face value, which at their nominal silver content of 90%, translates to 22.239 g of silver per dollar. All U.S. dimes, quarters, halves and 1 dollar pieces contained 90% silver since their introduction up until 1964 when they were discontinued. The combined mintage of these coins by weight exceeds by far the mintages of all other silver investment coins.
All 1965-1970 and one half of the 1975-1976 Bicentennial San Francisco proof and mint set Kennedy half dollars are "clad" in a silver alloy and contain just under one half of the silver in the pre-1965 issues.
Junk-silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom and Canada and 1945 in Australia. These coins are 92.5% silver and are in the form of (in decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences, and threepence. The tiny threepence weighs 1.41 grams, and the Crowns are 28.27 grams (1.54 grams heavier than a US $1). Canada produced silver coins with 80% silver content from 1920 to 1967.
Other hard money enthusiasts use .999 fine silver rounds as a store of value. A cross between bars and coins, silver rounds are produced by a huge array of mints, generally contain a troy ounce of silver in the shape of a coin, but have no status as legal tender. Rounds can be ordered with a custom design stamped on the faces or in assorted batches.
Silver exchange-traded products represent a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars. Silver ETPs include:
- iShares Silver Trust (NYSE Arca: SLV) launched by iShares is the largest silver ETF on the market with over 340 million troy ounces of silver in storage.
- ETFS Physical Silver (LSE: PHAG) and ETFS Silver Trust (NYSE Arca: SIVR) launched by ETF Securities.
- Sprott Physical Silver Trust (NYSE Arca: PSLV, TSX: PHS.U) is a closed-end fund created by Sprott Asset Management. The initial public offering was completed on November 3, 2010.
A silver certificate of ownership can be held by investors instead of storing the actual silver bullion. Silver certificates allow investors to buy and sell the security without the difficulties associated with the transfer of actual physical silver. The Perth Mint Certificate Program (PMCP) is the only government-guaranteed silver-certificate program in the world.
The U.S. dollar has been issued as silver certificates in the past, each one represented one silver dollar payable to the bearer on demand. The notes were issued in denominations of $10, $5, and $1; however, since 1968, they can no longer be redeemed for physical silver; nor for any other form of lawful money, except Federal Reserve Notes (or their coin-equivalents) - on a dollar for dollar basis.
Most Swiss banks offer silver accounts where silver can be instantly bought or sold just like any foreign currency. Unlike physical silver, the customer does not own the actual metal but rather has a claim against the bank for a certain quantity of metal. Digital gold currency providers and internet bullion exchanges, such as BullionVault or GoldMoney, offer silver as an alternative to gold. At least some of these companies do not allow investors to redeem their investment in actual silver.
Derivatives, CFDs and spread betting
Derivatives, such as silver futures and options, currently trade on various exchanges around the world. In the U.S., silver futures are primarily traded on COMEX (Commodity Exchange), which is a subsidiary of the New York Mercantile Exchange. In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 5 kg silver futures.
These do not represent silver at all, but rather are shares in silver mining companies. Companies rarely mine silver alone, as normally silver is found within, or alongside, ore containing other metals, such as tin, lead, zinc or copper. Therefore, shares are also a base metal investment, rather than solely a silver investment. As with all mining shares, there are many other factors to take into account when evaluating the share price, other than simply the commodity price. Instead of personally selecting individual companies, some investors prefer spreading their risk by investing in precious metal mining mutual funds.
In many tax regimes, silver does not hold the special position that is often afforded to gold. For example, in the European Union the trading of recognized gold coins and bullion products is VAT exempt, but no such allowance is given to silver. This makes investment in silver coins or bullion less attractive for the private investor, due to the extra premium on purchases represented by the irrecoverable VAT (charged at 20% in the United Kingdom and 19% for bars and 7% for bullion products with face value, e.g. The US Silver Eagle and the Canadian Maple Leaf, in Germany). Norwegian companies can legally deliver free of VAT to the rest of Europe within certain annual limits or can arrange for local pickup.
Other taxes such as capital gains tax may apply for individuals depending on country of residence (tax status) and whether the asset is sold at increased nominal value. For example, in the United States, silver is taxed only when sold for a profit, at a special collectibles capital gain rate (your normal income tax rate, subject to a maximum of 28% for silver held over 1 year).
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