What you should know before investing in silver

Investors who are considering the purchase of silver must give some thought to the danger of price fluctuations resulting from speculation. It may be safer to diversify by investing in an Exchange-Traded Fund representing a range of commodities.

Investing in silver

Silver has many industrial uses in jewellery, dentistry, electronics and medicine. Supply and demand for silver is therefore partly dependent on these uses, but silver is also seen as a comparatively safe haven when confidence in currencies is low. The silver market is however small compared to the market for gold, and the value of silver has historically been subject to marked price fluctuations. Anyone investing in silver should consider the extent of speculation that may be reflected in the cost of silver at any particular time. As the price is also influenced by supply and demand for silver in an industrial context, investors may need to consider the size of silver inventories before making an investment. Where inventories are high, there may not be any upward pressure on the silver price in the near future. An investment may be worthwhile where inventories are low, and additional purchases may be necessary for industrial use in the near future.

How to invest in silver

Silver may be purchased in the form of silver bars, coins, certificates, silver accounts or silver futures and options. It is possible to find spread bets or contracts for difference based on the price of silver. Investors should note that in European Union member states, buying coins or silver bullion is subject to value added tax, making the investment more expensive. For a safer investment, a potential investor in silver could consider an Exchange-Traded Fund (ETF), but this may be complex, and may invest in derivatives rather than holding silver physically. The prospectus or other information issued in connection with the ETF should be examined carefully so that the investor may assess the type of investments made by the ETF, and how closely they may track the silver price. More diversification of risk could be achieved by investing in an ETF covering a range of precious metals such as gold, silver, platinum and palladium, or an ETF representing a wider collection of commodities. Shares in mining companies could be used as a substitute for direct investments in silver, but the price movements of mining shares do not reflect the silver price very closely. These companies do not exclusively mine silver, but the metal is generally mined as a by-product of other metals such as copper and lead. Those metals form the majority of the business of the metal mining companies and their influence on the share prices is greater than that of silver.