Investing In Silver – A Beginners Guide
Silver had one of the most spectacular runs from September 2010 to April 2011 in the history of commodity markets. When silver gains momentum there are few other markets that can perform in such a spectacular fashion. Even after the spectacular run it had in 2011 there are many silver bulls out there who believe we are ultimately headed for $100+. If you want to participate in the silver market there are several different ways to do it.
#1 – Silver Futures (Comex & Mini)
This was my first introduction to silver back in 1988 when silver had a nice rally following the 1988 drought. At the time I bought an option on Comex Silver Futures and went on a wild ride. Back then however a $3 or 4 move was pretty substantial and didn’t happen on a weekly basis like it does today. The two different futures contracts that are available are the 5000 ounce Comex Silver contract that trades on the CME and the 1000 ounce E-Mini contract that trades on NYSE/Liffe. Both are viable trading vehicles with plenty of liquidity.
#2 – Silver Coins
This was the second way I purchased silver in 1989, unfortunately I bought too high in the quality structure (MS 65-66) and paid way too much. If you are buying simply for the value of the actual silver I would buy junk silver (pre-1965 coins) that contain roughly 90% silver. The other way to go is to purchase silver bars that come in a variety of sizes. Check prices at reputable online dealers before you venture out to local dealers, that way you will know the spreads ahead of time. There are lots of great dealers but plenty of crooks as well.
#3 – Silver ETFs
The explosion in popularity of SLV – the largest silver etf as well as the Physical Silver ETF (SIVR) and the Sprott Physical Closed End Fund had a lot to do with the sharp run up in silver. In the weeks leading up to the top I had heard from several different sources of people who were putting large chunks of their retirement accounts into the SLV. These ETFs generally move penny for penny with the price of silver so they are very volatile compared to the stock market. If you crave even more volatility, ProShares offers the Double Silver ETF (AGQ) as well as a Double Short Silver ETF (ZSL). Be careful with these as they are designed to be trading tools and not held as long term investments.
#4 – Silver Mining Stocks
My favorite silver mining stock is Silver Wheaton – SLW because they are not actually a mining company. They buy silver from other mining companies that produce it as a by product of copper mining etc. They typically pay low prices ($4-5) on a long term contract, so they have tremendous leverage as the price of silver rises. Since they have no mining risks or production cost risk it tends to eliminate some of the company specific problems that can plague mining stocks. The other way I like to play silver mining stocks is by using SIL which is a silver mining etf that is made up of all the major global silver mining companies. Mining companies tend to be leveraged to the price of silver so they can outperform when prices are rising but tend to under perform when prices are falling.
As you can see there are many different ways to purchase silver and it basically comes down to why you want to own it. If you are planning for the end of the monetary system, then it’s best to own the actual physical silver. If you are buying it to profit from a price rise, I prefer the mini futures contract as you can hold 1000 ounces for just a few thousand dollars. Just don’t over extend yourself, that’s the quickest way to get in trouble in the silver market. It’s definitely not a place for the faint of heart!