Sunday, 14 April 2013

Why to Invest in Silver

Is silver a good investment? The answer is 'yes'. Like gold, silver is a safe investment that offers an effective hedge against inflation and adverse economic conditions, apart from wealth creation. Unlike fiat currencies, the value of silver does not fall in real terms with time. However, before you decide on how to invest in silver or where to buy silver, you should know why to invest in silver. Here's a look at the pros and cons of silver investing:
  • Returns. Though silver is almost 17 times more abundant in nature than gold, it is more scarce in circulation. According to some estimates, the combined sovereign gold holdings by various treasuries in the world are more than the total mined silver available. Historically, silver has outperformed gold in terms of returns and it is truer in present times than ever before. Over the last two decades, the returns on silver have been almost three times that of gold. Since 2009, silver price has increased 87% with over 630% returns, while gold price increased 30% with over 250% returns.

  • Demand. The demand for silver is not driven by economic condition alone. It has a large use in industry and in recent years that has been the major factor for silver's price rally. Currently, almost half of the total demand for silver is industrial. Most of the silver that is used in industry cannot be extracted and recycled due to various reasons, implying that silver is being 'consumed' in manufacturing. Such demand is likely to continue pushing silver higher in the future.

  • Affordability. Known as 'poor man's gold', silver is a highly affordable precious metal for all practical purposes. The gold to silver ratio is one of the most watched metrics in the precious metals area. This ratio has been fluctuating over years. Even at current silver peaks the ratio stands at around 31, indicating that gold price is around 31 times that of silver. Therefore, affordability combined with returns makes silver a winning investment option.

  • Liquidity. Like gold, silver has high liquidity and is easily traded in various forms all over the world. For long, silver was used as a currency in different parts of the world and enjoys similar recognition even today.

  • Alternatives. There are various types of investments in silver that you can choose as per your requirements. These include bullion coins, collector's coins, bars, silver rounds, jewelry, junk silver, scrape, mutual funds, Exchange Traded Funds (ETFs), futures, options, certificates, and silver accounts.
  • Bulk. Due to its low pricing, an equivalent amount of investment in silver is much heavier and requires more storage space than gold. This adds to transportation, insurance and storage costs for silver.

  • Maintenance. Silver gets oxidized readily, losing its sheen to a blackened appearance. Some of the premium that is paid at the time of buying a piece of silver is related to its appearance. You may lose out on such premium on your tarnished holdings at the time of selling. Therefore, it is very important to retain your physical silver in pristine condition. Bullion coins and certain numismatic coins are often available in protective covering that protects them from oxidation. However, silver bars are exposed and face a greater risk of tarnishing.

  • Taxation. Unlike gold, silver is subject to taxation in most of the nations, either as capital gains tax or as value added tax. The tax rates in various countries range between 7% and 22%.

  • Instrument-specific drawbacks. Individual forms of silver investments have different types of disadvantages. For instance, futures are subject to inherent riskiness of the metal and markets. Another example is jewelry, which is unprofitable because its price includes crafting charges that fetch no value at the time of sale.

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