What is ‘Paper Silver’?
Paper silver’ can be used as a proxy for the real stuff, but it’s essential to understand the pitfalls as well as the advantages when considering the type of gold that fits your portfolio.
Paper silver is often better suited to short-term speculation and will not always insure your portfolio or harden your investments against financial turmoil. As the pyramid of risk shows, owning and investing in physical Silver bullion is the least risky, most manageable and least taxed (depending on individual circumstances) way to secure your wealth with gold.
There are many ways to invest in silver, most of which don’t allow you to physically handle your own silver. The silver is yours on paper only, whether you invest in
- An exchange-traded gold fund (ETF) or a traditional silver fund
- A mining company
- Silver futures trading or Contracts for Difference (CFD)
- Digital silver
- Spread betting
Ways to invest in silver
Exchange traded funds
- Silver-backed Exchange Traded Funds are funds in which you can trade shares like a stock. As the name implies the shares are backed by underlying physical silver stores and track the silver price.
- ETFs are popular because they are very liquid and easy to trade but they are not risk-free.
- Even if you can’t liquidate your shares into silver, investors still have to rely on the fund to honour the investment. The fund is the first counterparty that comes with the risk of default, but it’s not the last. The fund will inevitably use a financial institution to source and store the silver, and they add a second level of counterparty risk to the investment. It’s possible there will be further layers of counterparty risk in certain ETFs.
- Although silver ETFs don’t attract spread charges, there are ongoing costs for holding the fund, and there may also be trading charges depending on which platform and ETF is used. ETFs also attract capital gains tax on the profit when sold. When considering a silver-linked investment, the risks and costs should be weighed alongside the liquidity benefits.
Contracts for difference
- Investors who are intent on avoiding owning the physical silver asset, even if by proxy in a fund, may choose to trade a Contract for Difference. This is an agreement between a buyer and seller to exchange the difference in the value of an asset over time. The buyer never has to own the asset (silver in this case), and can profit whether the price moves up or down, so long as they correctly predicted the direction of travel.
- This complex instrument is really only suitable for experienced investors as it comes with greater risk (of losses or counterparty risk) than trading ETFs or physical silver, but may appeal to those with a higher risk profile who want to trade on silver price movements in either direction.
Mining stocks
- Silver miners are another way to gain exposure to silver on the stock market. Listed mining shares are easily traded and reflect, in part, the fortunes of the silver price. But the actual spot silver price forms only a part of the value of a silver miner.
- Most mining companies that produce silver also produce other precious metals, like gold, within their mining portfolio. So the share price may also be impacted by the other precious metals it mines.
- Investing in silver mining stocks also means investing in the proficiency of management, the efficiency of operations, and the profitability of the company. In addition, investors take on counterparty risk, country risk depending on where their mines are located, safety risk, debt risk and other organisational risks that affect the share price irrespective of how the silver price performs.
- Mining shares are suitable for investors who want exposure to stocks that are linked to the price of silver but also reflect the corporate fortunes of the company.
Digital silver
- Digital Silver is an electronic form of currency that is based on units of physical silver. The owner of the digital silver has claim on its physical counterpart but more often than not never chooses to ‘collect’ on the silver. Instead the digital silver can be held, sold, or used to make purchases.
- Ultimately, digital silver has to be issued and underwritten by a company or institution, and that carries substantial counterparty risk. Some digital silver is recorded in the same blockchain format as cryptocurrencies, and is held as tokens in a digital wallet and sold on exchanges. This association with cryptocurrencies may be detrimental to its reputation, but the argument is that unlike other cryptocurrencies, digital silver is backed by the physical product.
- Other institutions are selling digital silver within their own platforms as a way for investors to own silver without the restrictions of coin or bar weight. The silver is never delivered, but is allocated to the investor as a fractional part of a larger 400 gram bar, and can be bought or sold back to the provider digitally. This digital silver relies entirely on the counterparty to uphold their obligations, and it still incurs storage fees.
Spread betting
- Spread betting is another tool that enables an investor to bet on the movement of the price of silver (or any commodity, share or market) without actually ever owning it. Placing a ‘bet’ on the way the silver price will move means if it goes the right way, you can realise a profit, but by the same token if you bet wrong, you will incur losses. Investors also don’t have to cover the full cost of their ‘bet’, which means your gains can be greatly amplified, but so can your losses. Spread betting is incredibly risky and should only be undertaken by experienced investors.
Physical silver
- While paper silver will always have a place in the investment pantheon, physical silver has many inherent advantages. Paper silver is often portrayed as cheaper and easier to own but there are usually ongoing management and trading fees for owning paper silver in the same way as physical silver incurs storage costs (unless it is delivered).
- Investment grade currency coin silver minted by the Royal Mint incurs no capital gains tax, and it is possible, if stored outside of the EU, to incur no VAT on physical silver. Taking delivery or utilising storage within a secure vault removes the counterparty risk associated with paper silver, removing it from the financial system altogether in a way that paper silver can never be.
- This is one of the most important advantages of physical silver, because in the event of financial upheaval, silver still belongs to the investor. Owning the physical metal is the best way to utilise silver’s safe-haven status and ensure investors benefit from its security and long-term store of value.
Discover all there is to know about buying Silver for investment
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Discover all there is to know about buying gold for investment
Our free Investor Guide will reveal:
- How to invest in gold
- Timing & pricing considerations
- Our buy back guarantee