Have you ever thought about investing in silver? In this article, we discuss what silver is, what uses it has, factors that influence prices, the gold silver ratio and various price forecasts. We then go over some common ways to invest in the commodity and how you can do so via DEGIRO.
What is silver and what is it used for?
Silver is a highly conductive precious metal that has a wide range of uses. It can be made into bullion in the form of coins and bars, but is also used as jewelry and silverware. Compared to other precious metals such as gold, silver is also used for a wide range of industrial purposes. It was reported in 2019 that industrial applications accounted for around 56% of total silver demand.
Some examples of industrial applications include batteries, medicine, photography, photovoltaic energy, touch screens, 3D printing, engines, plastics, semiconductors and more. The commodity is also used in 5G technology. This technology is still being rolled out, but the Silver Institute predicts that it will come with an increase in demand for silver. The company predicts that 5G-related demand currently accounts for 0.75% of annual supply, but will grow to approximately 2.3% by 2030.
Factors that influence silver prices
Silver is often referred to as the ‘Poor Man’s Gold’ because it is the much cheaper precious metal of the two. The price of silver is impacted by several factors:
Supply and demand
With any financial asset, supply and demand are key factors in the price you will pay for it. On the supply side, there is a finite amount of silver in the world. Therefore, supply is limited to what is already in circulation and what has yet to be mined. Many factors can impact demand. An example is industrial output levels due to silver’s various uses.
Price of gold
Although this is not always the case, the price of silver tends to fluctuate in tandem with gold prices. In general, when the price of gold goes up or down, you can expect silver prices to follow. The price of silver, however, is usually more volatile than gold partly due to its smaller market.
Value of the dollar
Silver prices are normally US dollar-denominated and there is generally an inverse relationship with silver prices and the US dollar. Typically, when the US dollar is weak, this can lead to an increase in the silver price.
The gold silver ratio
When trading gold and silver, it is common to hear about the gold silver ratio. This represents how much silver is needed to purchase one ounce of gold. Since the prices of both precious metals are constantly fluctuating, the ratio between the two continuously changes.
Some investors use the ratio to help determine which metal will outperform the other. A rising gold silver ratio indicates that gold is outperforming silver and, likewise, silver is outperforming gold when the ratio falls. In times of economic downturns, the ratio tends to rise as some investors may view gold as a safer investment. After a recessionary period, the gold-silver ratio tends to fall due to the industrial nature of silver and increased demand when economies begin to recover.
Before the beginning of the 20th century, the gold silver ratio was fixed. During the period of the Roman Empire, the gold silver ratio was fixed at 12. In 1792, the US government fixed the ratio at 15, which was generally universally used until the end of the 19th century at the end of the bi-metallic era. For some current context, last year, the average for 2019 was 86.04. A record was recently broken in March 2020 as the gold silver ratio peaked at 123.78, the highest it has been in over 5,000 years.
Silver price forecast
Similar to many other stocks and financial products, silver prices took a hit in March 2020 amid the COVID-19 pandemic. Prices dropped fell below $12 an ounce, its lowest level in 11 years.
An analyst at ABN AMRO said that while silver has made considerable gains since lows in March 2020, it will take time for its value compared to gold to return to normal levels. She stated that the long-term average of the gold silver ratio is around 60. Therefore, it is possible for silver prices to begin to outperform gold prices, but she doesn’t see this happening in the short-term. In the long-term, however, she expects that silver prices will outperform gold once the global economy begins to recover.
Below are some other price forecasts that have been made:
In mid-June 2020, it raised its three, six and 12-month forecasts to $19, 21 and $22 per ounce. Previously, the company had predicted prices at $13.5, $14 and $15 per ounce respectively.
Bank of America
Bank of America analysts indicated in June 2020 that they believe the future is bright for silver as economies begin to recover and uses for the commodity evolve, citing 5G technology as an example. The bank’s silver price predictions for 2020 and 2021 are an average of $16.87 and $23 an ounce respectively.
The financial markets data and infrastructure provider’s forecast for 2020 is that silver prices will average $15.75 an ounce, as per April 2020. It stated that industrial demand for silver will be negatively impacted this year due to implications of COVID-19, however, it indicated that investment demand will be strong for exchange-traded products (ETPs) and silver bars and coins.
Investing in silver
Being a versatile metal, silver presents many investment opportunities. There are many ways in that you can invest in silver, each of which having risks involved. It is important to only invest in financial products that match your knowledge and experience and are suitable for your investment strategy. Below are some common ways to invest in silver:
One way to invest in the commodity is to physically buy silver. For example, you can purchase silver in the form of bullion, silver coins or jewelry. Silver bars and coins can typically be purchased at banks or bullion dealers.
Another way is to buy stock in silver mining companies. Generally, when there is a rise in the value of silver, stock prices for silver mining companies tend to increase as well. However, there can be company-specific risks involved that should be taken into account. For example, even if the silver market is doing well, a mining company could experience an unforeseen accident that could impact its financial standing and stock performance. You can also invest in silver streaming companies. Streaming companies do not mine silver themselves but rather provide financing to companies that do.
There are also many silver ETFs available to invest in so that you can put your money into the silver market. ETFs have become popular in recent years since they offer trading flexibility and portfolio diversification for relatively lower costs. Investing in silver ETFs allows you to closely track the price of silver without actually owning the commodity. In general, silver ETFs are more liquid than owning silver itself. During the time period 01.01.20-25.06.20, the most traded silver ETFs via DEGIRO were:
- WT PHYSICAL SILVER (JE00B1VS3333)
- ZKB Silver ETF (CH0183135976)
- ETFS SILVER (GB00B15KY328)
Additionally, you can invest in silver futures. Silver futures are exchange-traded contracts in which the buyer agrees to purchase a specific quantity of silver at a predetermined price and date in the future. When taking a long position, there is an obligation to accept delivery of the physical metal, whereas a short position takes on the obligation to make the delivery. Futures are complex instruments and can have a high risk of losing your investment, or even more.
Investing with DEGIRO
It is possible to invest in silver via DEGIRO. We offer a number of silver stocks as well as ETFs that you can invest in with our incredibly low fees. There is even a silver ETF on our list of commission-free ETFs.
In addition to silver stocks and ETFs, DEGIRO offers a multitude of other companies and financial products to invest in on more than fifty exchanges across thirty countries. For details, please visit our Products and Markets page.
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Sources: Reuters, S&P Global, Forbes, Silver Institute, Investopedia, Kitco, NASDAQ, FXStreet