Silver as an Investment

Silver served as money for thousands of year until the gold standard was introduced in the XIX century. Although not money, silver is used as an investment. Like gold, silver is a monetary asset, which may be used as a hedge or safe-haven against tail risks. However, silver is much more widely used in the industry; therefore it behaves more like commodity and is more business cycle-sensitive than gold.

Silver Investment Market

The silver market is a global market, with London and New York being the two biggest market places for silver in the world. The silver market is much smaller than the gold market. It is estimated that the London silver bullion market turns over 18 times less monetary value than gold. Silver is also widely traded in the over-the-counter market, however, the futures market dominates the silver trade.

Silver Price

As in the case of gold or any other good, the price of silver is determined by supply and demand. However, the price of silver is much more volatile than the price of gold, which results from a less liquid market (some analysts argue that the price of silver may be, thus, easier manipulated than the price of gold). The London Bullion Market Association determines the silver fix once a day. The so-called LBMA Silver Price is set daily at 12:00 p.m. GMT, serving as a benchmark for pricing silver. The current process of fixing was introduced on August 15, 2014, which replaced the 117-year old fix.

Silver Investment Reasons and Drivers

Silver has a dual nature: it is a monetary asset and an industrial commodity. Therefore, the monetary aspect of silver explains why many reasons for investing in silver are the same as in the case of gold. Silver can be used as a portfolio diversifier, since it has very low correlation with other assets (except gold and copper). Actually, silver has very high positive correlation with gold (often more than 90 percent). This is why the white metal is also a hedge or safe haven, which can be seen as an insurance against tail risks, financial black swans, high and accelerating inflation or systemic crises. This is also why the price of silver is influenced, like gold, by the U.S. Dollar Index, real interest rates and the fear level.

However, silver has also an industrial aspect, which explains why the white metal is often positively correlated with the level of business activity and industrial production. The price of silver is also influenced by the situation in the base metals markets, since silver is mined as a by-product of them. Last but not least, silver prices are in gold’s shadow. Silver may be even considered a more leveraged or speculative version of gold. Silver prices are almost two times more volatile than gold prices, therefore silver is a much riskier investment with higher beta (investing in silver increases potential profits, but also potential losses compared with gold). Therefore, the impact of changes in risk-aversion among investors is less unambiguous than in the gold market. Investors should also remember that silver prices tend to follow gold prices with some lag, just to catch up with them later, often over-reacting compared with gold’s behavior.

Silver Investment Vehicles

There are many ways to invest in silver. The most traditional way is by buying silver bars or coins. However, investors can also purchase silver exchange-traded products or silver certificates, to avoid the risks and costs associated with the transfer and storage of physical bullion (silver is less dense than gold, therefore it occupies much more space). Investors can also invest in silver via derivatives, such as forwards, futures and options. The indirect way to have exposure to the price of silver is buying the shares of silver streaming or mining companies (however, investors should remember that, unlike gold, silver is rarely mined alone, therefore silver mining shares are a base metal investment rather than a pure silver investment).

We encourage you to learn more how to successfully use silver as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.