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 US dollar and silver prices generally have an inverse relationship.
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.
The gold silver ratio represents how much silver is needed to buy one ounce of gold.
Silver price predictions
In the past few weeks, Reddit users and retail investors have been rallying together and driving the prices of certain stocks up. You may have heard of this in regards to GameStop, but this has also been the case for silver mining stocks and exchange-traded funds (ETFs) that are backed by silver bars.
On February 1st, silver prices climbed to an eight-year high, surpassing $30 an ounce. In addition to stocks and ETFs, investors were also piling into silver options and futures, which resulted in the Chicago Mercantile Exchange (CME), the world’s largest derivative exchange, to raise margin requirements for silver contracts. Following this, silver futures fell as much as 10%, the biggest loss since August 2020.
While silver prices have gone down since its recent rally, Goldman Sachs has a positive outlook on the commodity’s prices. On February 2nd, Bloomberg reported that the bank sees silver prices rising as high as $33 an ounce if Joe Biden’s administration boosts spending for solar power. That same day, Bank of America published a report indicating that it expects prices to push to $35 with the chance that prices could reach all-time highs around $50 an ounce. HSBC did not provide a price outlook following silver’s price spike, however, the bank suspects that prices will remain volatile during 2021.
Many analysts remain bullish on silver prices following volatility in early February, driven by retail investors.
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 plan. Below are some common ways to invest in silver:
Bullion: 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.
Stocks: 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.
Examples of silver stocks are Silvercorp Metals Inc. (CA82835P1036), Fortuna Silver Mines (CA3499151080) and Pan American Silver (CA6979001089).
ETFs: 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.
Examples of silver ETFs are WisdomTree Physical Silver (JE00B1VS3333), Xtrackers Physical Silver (DE000A1E0HS6) and Sprott Physical Silver Trust (CA85207K1075).
Futures: 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.
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 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.
Deemed authorised and regulated by the Financial Conduct Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website.
Sources: Reuters, S&P Global, Forbes, Silver Institute, Investopedia, Kitco, NASDAQ, FXStreet, Yahoo Finance