Investing In Silver: The Definitive Guide

Silver has been an important metal for thousands of years, often used as a medium of exchange or jewelry in ancient times. The mineral was traditionally mined alongside copper and lead deposits across the Near East and the Mediterranean around the height of the Roman Empire. After the Spanish conquests of the New World, the focus of the silver market shifted to Latin America and the massive deposits located in Mexico, Bolivia, and most importantly, Peru. Briefly, the U.S. was at one time the world’s largest silver producer thanks to the discovery of a massive silver deposit in Nevada (the Silver State), although this production eventually petered out and Latin American production once again reigned supreme [for more silver news and analysis subscribe to our free newsletter].

Silver Wheaton Corp. (USA) (NYSE:SLW)

Today, silver still finds its way into jewelry and coins but it is now also a key ingredient in many ‘modern’ applications as well. Chief among these new age uses are a host of medical applications ranging from dentistry to wound treatment, while the mineral also makes its way into technological applications such as photographic paper, batteries, and audio connectivity wires.

Due to this multitude of uses, the metal has continued to be a popular investable asset, attracting investors from around the world thanks to its numerous potential usages as well as its traditional role as a store of value and an inflation hedge.  There are a number of different options for investing in silver, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and both physically-backed and futures-based ETFs and ETNs. Investors also have the option of buying up coins or bars of the metal in order to obtain physical exposure [see also 25 Ways To Invest In Silver].

Physical Properties And Uses Of Silver

Silver is a very malleable and ductile metal, prized not only for its hardness but for its brilliant white shine. Furthermore, the metal has the highest electrical conductivity and the highest thermal conductivity of all the metals. This combination ensures that silver finds its way into a multitude of uses ranging from jewelry and coins to medicine and electrical wiring.

While the photographic segment of silver demand may be waning, silver’s use in photovoltaic cells in solar panels are becoming extremely important to the silver industry. This is especially true since the world is beginning to rapidly shift towards alternative fuel sources and silver remains a relatively cheap and quality metal in the photovoltaic process. This comes at a great time for the solar industry since the photographic uses are beginning to decline quickly thanks to the advent and now widespread use of digital photographic methods. As digital photographs take off in emerging markets, demand for silver is likely to be limited. However, given the multitude of other uses for silver in the technological and medical fields it remains to be seen if this will impact the price or if things will even out for the industry.

Currently, just 6% of silver is used for investment while the vast majority (near 40%) goes to industrial uses, a third to jewelry, and the rest to photographic uses. This breakdown shows that unlike gold, silver has a wide number of uses and that large purchases by investors, or more widespread use of ETFs, will likely have a minimal impact on the marketplace and the overall supply and demand picture [see also Do You Buy In To The Precious Metals Rally?].

Silver Supply And Demand

Demand for silver has soared over the last several decades as emerging markets continue to grow and require more silver for electrical, medical, and ornamental purposes. The Andean region of South America, which includes Chile, Bolivia, and Peru, is the most active silver producing region in the world, accounting for close to one-quarter of global production in recent years. The three nations also make up close to 40% of known reserves ensuring that these countries dominate the discussion of silver prices. Because of this concentration of production, supply disruptions in the region have the potential to move prices sharply. Mine strikes, natural disasters, or spikes in geopolitical tensions in the region often send global silver prices higher in the short-term.

Peru in particular, despite its relatively small size, plays a major role in the mining and production of silver. The country is responsible for roughly 20% of the world’s production and reserves over the years. Other major producers include Australia, Mexico, and China. Below is a table highlighting some of the biggest producing countries as well as their known reserves of the precious metal (all data in metric tons):

Country 2010 Production 2011 Production Reserves
U.S. 1,270 1,160 25,000
Australia 1,860 1,900 69,000
Bolivia 1,260 1,350 22,000
Canada 600 700 7,000
Chile 1,280 1,400 70,000
China 3,500 4,000 43,000
Mexico 4,410 4,500 37,000
Peru 3,640 4,000 120,000
Poland 1,180 1,200 85,000
Russia 1,150 1,400 NA
Other Countries 2,950 2,200 50,000
Global Total 23,100 23,800 530,000
Source: minerals.usgs

Below is a list of the world’s top ten silver producing companies in 2011. While many of these companies have high levels of output, it is important to remember that many of them do not exclusively focus on silver and thus may not be the best ‘pure play’ on silver prices. With that being said, we have put an asterisk next to the companies that have been identified as ‘primary silver producers’. (All figures are in millions of ounces) [see also 4 Commodity ETFs for Day Traders].

Company Based In Output
KGHM Polska Miedz Poland 40.5
BHP Billiton PLC Australia 39.0
Fresnillo PLC Mexico 38.0
Goldcorp Inc Canada 28.8
Pan American Silver Canada 21.9
Volcan Cia Minera SAA Peru 21.1
Polymetal International PLC Russia 19.9
Coeur d’Alene Miners Corp USA 19.1
Cia de Minas Buenabentura Peru 15.3
Hochschild Mining plc Peru 15.0
Souce: silver institute

Although silver is by far the cheapest of the precious metals on a per ounce basis, steps are always being made to replace the metal with cheaper counterparts. In the film industry in particular, strides are being made to reduce silver usage across the board. Film with reduced silver content, silverless black-and-white film, and xerography (a photocopying method) substitute for silver that has traditionally been used in black-and-white as well as color printing applications are currently the most popularapplications. In the medical space, surgical pins and plates may be made with tantalum and titanium in place of silver, although the cost effectiveness of this process may become questionable if titanium and tantalum prices rise.

Another major silver dependent industry that has seen huge inroads in recent years has been in the ‘silverware’ segment where stainless steel may be substituted for silver flatware. Germanium can also be added to this compound in order to make the flatware tarnish resistant. Lastly, aluminum and rhodium are being used to replace silver that was traditionally used in mirrors and other reflecting surfaces, achieving great cost savings in the process [see also The Most Popular Leveraged Commodity ETFs].

Price Drivers

As a global commodity, the price of silver is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of silver include:

Emerging Market Demand: Silver demand has surged in recent years thanks to rising wealth levels in emerging markets across the globe. This increase in income has allowed consumers to buy up more jewelry, silverware, and other status symbols, helping to boost the price of the precious metal.

Inflation/Currency Issues: Silver is seen as an inflation hedge and has been a store of money for centuries. If the people of the world lose faith in fiat currencies, it will likely be gold and silver that benefit. While gold often steals the show, silver is more volatile; meaning that while it leads on the downside it also leads on the upside as well. Furthermore, since silver is less than 1/40ththe price of gold, it remains an obtainable goal for many people in poorer countries around the world, suggesting that demand could be lifted by those without the wherewithal to buy gold but are still looking for an inflation hedge.

Photography Industry: Silver is extremely important to the photography industry where in 2009 usage hit 160 tons, down from just under 190 tonnes in 2000. If this downward trend continues it could put significant pressure on the industry but then again, thanks to the metal’s near 99% recycling rate out of photographic film, this might not be such a negative after all.

Supply Disruptions: Because a significant portion of global supplies come from South America,supply disruptions in the region can have a major bearing on global prices. Strikes at major silver producing mines are relatively common, and natural disasters—such as earthquakes or landslides—occur from time to time as well.

Use of Substitutes: Technological advancements have made possible substitution of cheaper metals in certain applications. For example, aluminum and rhodium are replacing silver in mirrors and other reflective surfaces, stainless steel is replacing silver in flatware and the move towards digital photography has hurt silver demand as well. However, this substitution trend can work both ways; many are experimenting with using silver in place of platinum or palladium in numerous applications due to its drastically cheaper price per ounce. If these substitutions in-favor of silver outweigh the negatives, the substitution process could be a net benefit for the white metal.

Investing In Silver

Silver has appeal as an investable asset for several reasons. First, the metal has been a store of value for thousands of years and it is widely recognized the world over. The metal also has the potential to act as an inflation hedge, appreciating in value when prices broadly rise. Furthermore, unlike the rest of the precious metals group, silver is widely used both in the investment world and in the industrial one suggesting that it may be a more balanced, but volatile, play than gold, platinum, or palladium.

Physical Silver

Options for investing in physical silver are numerous to say the least. Due to the product’s relatively low price, wide number of uses and resistance to corrosion, silver coins, ‘rounds’, and bars are very popular among many investors. Several countries mint coins, the following is a list of the most popular issuers:

U.S.- ‘Walking Liberty’/’American Eagle’
Australia- ‘Koala’ and ‘Kookaburra’
Canada- ‘Maple Leaf’
China- ‘Panda’
Mexico- ‘Libertad’

In addition to these coins, investors have the option to buy bars in various denominations ranging from one ounce up to 100oz. bars and beyond. Investors also have the option to buy old U.S. coins which have high levels of silver. There are numerous resources on the internet which detail various coin denominations and how much silver each type of coin has. Among the most popular choices for investors seeking to go this route are with Half Dollars (1965-1970) and Eisenhower Dollars (1971-1976) which are both 40% silver. However, it should be noted that under a law passed in 2006 it is illegal to melt coin currency, with violators facing up to five years in prison and $10,000 in fines.

Silver Futures

Silver futures are traded on the Chicago Mercantile Exchange under the product symbol SI. The contracts are quotes in U.S. cents per troy ounce and each contract represents 5,000 troy ounces. Trading terminates on the third last business day of the delivery month and trading is conducted for delivery during the current calendar month; the next two calendar months; any January, March, May, and September falling within a 23-month period; and any July and December falling within a 60-month period beginning with the current month. Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month. Trading terminates on the third-to-last business day of the delivery month. Trading at settlement is allowed in the active contract months of May, May, July, September, and December. Silver futures are subject to NYMEX position limits.

Silver Miners

Investors can also obtain exposure to silver by purchasing stocks of companies that are engaged in extracting and selling the metal. Like most companies, the profitability of silver miners depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when natural resource prices are elevated—especially if significant portions of the cost structure are fixed in nature. Mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.

Many of the largest mining companies are engaged in the extraction of a variety of resources, including various precious and base metals. There are, however, a number of “pure play” mining companies and firms whose primary focus is silver:

Silver Wheaton Corp. (NYSE:SLW)
Industrias Penoles S.A.B. de C.V. (MEX: PE&OLES)

[see the holdings of the Global X Silver Miners ETF for a more detailed list of silver miners]

Silver ETFs

There are multiple ETFs offering exposure to silver as well, including funds that invest in futures contracts, the physical metal, and funds that invest in stocks of mining companies. Additionally, investors have exposure to the short side of silver via the ProShares UltraShort Silver Fund (ZSL). For exposure to the physical metal, two choices exist:

iShares Silver Trust (NYSEARCA:SLV)
Silver Trust (NYSEARCA:SIVR)

If an investor is looking for futures exposure the following two ETNs are quality choices:

PowerShares DB Silver Fund (NYSEARCA:DBS)

Lastly, for investors seeking leveraged or inverse exposure to the white metal have the following options:

ProShares Ultra Silver (NYSEARCA:AGQ) offers 2x exposure to the price of silver.
VelocityShares 3x Long Silver ETN (USLV) offers 3x exposure to silver future contracts.
VelocityShares 3x Inverse Silver ETN (DSLV) offers 3x exposure to the inverse of silver future contracts.

As mentioned above, the Andean nations of South America are among the largest producers of silver. While the economies of these countries have become increasingly diversified in recent years, there is still a link between prices of silver and economic strength. As such, the following country-specific and region-specific ETFs may also be impacted by the price of silver:

iShares MSCI All Peru Capped Index Fund (NYSEARCA:EPU)
iShares MSCI Mexico Inv. Mt. Idx. (NYSEARCA:EWW)
Global X Funds (NYSEARCA:AND)

This article was originally written by Carolyn Pairitz, and posted on CommodityHQ.