Buying Physical Silver: a Guide for Investors

By Michelle Smith – Exclusive to Silver Investing News

US Representative and Republican presidential contender Ron Paul made an excellent case for owning physical silver. Last week, when Federal Reserve Chairman Ben Bernanke was on Capitol Hill for a congressional hearing, Paul held up an ounce of silver and told Bernanke that back in 2006 it would have bought over four gallons of gasoline. “Today, it’ll buy almost eleven gallons of gasoline,” he said, adding, “that’s preservation of value.”

For many people, silver is an inflation hedge or a safe haven. They buy the metal because the purchasing power of their money is rapidly eroding. Instead of holding cash, they protect their wealth in a product whose value isn’t likely to deteriorate. Many also view silver as a universal currency that can be used as money or exchanged for fiat currency if a particular monetary system fails.

Then, there are some investors who simply see profit in the metal. They buy in at one price with the intention of cashing in at a higher price.

Spot prices

Whatever one’s motives, plans to invest in physical silver should begin with an understanding that the metal’s spot price is like a base cost. Investors should not expect to buy silver at these prices. Instead, the spot price provides a gauge for how much investors should pay for a particular product at a given time.

The mark up above the spot price is the premium. Premiums are part of the game, but all are not created equally. The same product from two different sources can be two different prices, so it is in investors’ best interests to protect their profits by doing comparison shopping.

However, a lower premium does not always translate into the best choice. Ensuring that purchases are made from reliable sources that will deliver the agreed upon products in a timely manner is more important. Further, even if one seller’s premiums are higher, other fees may be cheaper, so investors should assess the total cost of each deal.

Common physical silver products

The next thing to consider is what type of silver to buy.

Coins are one of the most popular investment products. Items such as the Canadian Maple Leaf, the American Silver Eagle and the Mexican Libertad are government-issued legal tender.

Silver rounds are similar to coins except they are privately produced and are not legal tender. Both rounds and coins are available in a variety of weights, ranging from a fraction of an ounce to multiple ounces.

Silver bars are also available in a range of sizes. These may be the best entry point for individuals looking to make small investments, as they come in units as small as one gram. Bars may also be optimal for large investments since weights range up to 100 oz units.

When purchasing any of these products, an investor’s first priority should be to ensure that they are .999 fine.

The choices can be further narrowed down by determining whether a form preference outweighs price. One might assume that a given amount of silver will cost the same amount despite form or manufacturer, but that’s not the case. The more generic a product is, the cheaper it is likely to be. Rounds often have lower premiums than coins, and bars may be even cheaper than both.

.999 silver products can be purchased directly from mints or from dealers, and most transactions can be conducted online. However, investors should be aware that credit card users are often charged higher prices or additional fees.

Even when low-cost products are available, investors should consider whether small purchases are worthwhile when factoring in costs such as shipping and handling and insurance. These costs are often calculated based on purchasing ranges. For example, $15 may be charged for purchases ranging from $50 to $150.

Many sellers have incentives whereby they offer discounts for larger orders.

Futures for silver

It is also possible to purchase silver using futures contracts through an exchange such as the COMEX. This is an arrangement where the price of silver is negotiated at present and delivery is made in the future.

Futures are largely considered paper silver markets because most people playing in this space do not take possession of the silver they buy, though it is possible to do so. Obtaining silver by way of futures contracts is an option best-suited to seasoned investors. It requires a sizable investment, involves a number of additional costs, and is a process that can be complex and lengthy.

Other silver products

Junk silver is an increasingly popular investment category. It refers to old coins that are not .999 pure but are sold for their metal content, which generally ranges from 35 to 90 percent silver. Those with the highest silver content are the most valuable. Some investors also play the market with scrap silver, which encompasses a broad range of items from broken jewelry to platters and spoons.

Junk and scrap silver are exceptions that can allow investors to purchase the metal without a premium, or perhaps even below spot prices. Some of the same dealers that sell .999 silver products also sell junk coins and other silver items. The best bargains for these products are often from individuals, auctions, and antique or thrift dealers. Many of these sellers are not concerned with making sales based on the metal value.

Investors still need to make sure that they know what they are buying, and purchases should be made with the understanding that these types of physical silver are generally less liquid than the purer investment products discussed above.

After delivery

So you’ve bought silver, the products are delivered – now you may wonder what do with them. This answer will depend upon how much silver you have (or plan to acquire), how much risk you are willing to take, and how much you are willing to pay to avoid unwanted risks. Each option has pros and cons.

Some people choose to store their silver in a secure location in their home or office. This option is likely the riskiest since it involves the highest potential for loss due to theft or disaster. If such an event occurs, the insurance policy covering the property may only pay a fraction of the value of the lost metal, if it is covered at all.

Safe deposit boxes keep the metal readily accessible, but are considered a more secure option. However, while the chances of theft are reduced, they are not eliminated, and the risk of loss still exists by way of disaster. The insurance which covers regular bank deposits isn’t likely to extend to the contents of safety deposit boxes; the bank may offer some other type of coverage, but this is not a given, and may only offer limited compensation.

Storing the metal in a depository drastically reduces the likelihood of losses. These facilities are insured, and are designed to provide superior protection. The amount of coverage varies. Usually depositories do not have coverage for 100 percent of their holdings, but chances of a 100 percent loss are minimal. A drawback with this option is that in the majority of cases it has the most limited accessibility.

Storing silver in a safe deposit box or depository are the safest options, but the fees associated with them add to the cost of owning silver. These fees, especially over long periods, could be significant for investors who only have small amounts of silver.

Avoiding the hassle with ETFs

ETFs may be somewhat misleading. The term “physically-backed” may lead investors to believe that upon purchasing shares, they have silver. In reality, though someone may have silver, it is not the investors. They merely receive claims on the value of the amount of silver that each share purchases.

If an investor buys ten shares of an ETF, each of which is equivalent to an ounce of silver, he is not entitled to the metal. When he sells the shares, he is only entitled to the current value of ten ounces of silver.

Another option marketed to investors who want to avoid the hassles of ownership are bullion banks or silver certificates, operations where investors maintain accounts that allow them to pay for silver that is purchased and stored on their behalf. While these operations may allow investors to take possession of their silver, doing so may be subject to rules such as the requirement that an individual acquire a certain amount before requesting delivery.

Both ETFs and bullion banks are subject to scrutiny as some question whether they possess the silver they claim to have. Investors have to determine how much faith they are willing to place in these arrangements on an individual basis.

One thing to consider when making the decision, however, is that in developed nations people are more prone to entering into good faith arrangements such as these, whereas demand in emerging nations is growing, and investors there are more likely to take possession of what they pay for.

Reported figures of the amount of investment grade silver make it sound as if there is an abundance to be had, but there have been an increasing number of reports of buyers having difficulty getting their hands on the metal, especially when they want significant quantities. This raises concerns that there may not be as much silver floating around as the markets have led investors to believe, and may provide an incentive for investors to take the options that offer the best accessibility.