When you're looking to buy silver, the first question to answer is, should I buy physical silver or paper silver?
Physical silver refers to silver bullion or coins. There are a number of considerations to make before buying to make sure you get the best deal and that you buy from a reputable seller.
Paper silver refers to either shares in silver exchange-traded funds (ETFs) that move with the price of silver, or futures contracts where there is an amount of physical silver underlying the contract.
Both investments let you profit from silver's price moves. To decide which one is best for you, you need to answer some questions about your investment goals.
To help, here's a closer look at each way to profit from silver.
Buying Physical Silver
There are a lot of benefits to buying physical silver instead of paper silver, but the biggest one is that it offers a hedge against calamity in the broader markets. It won't be fazed by a weakening dollar or a plunge in the Dow Jones Industrial Average.
The hedging qualities of physical silver make it an attractive investment regardless of price movements.
"I have physical silver," Money Morning Defense & Tech Specialist Michael A. Robinson said earlier this year. "I might have bought some at the top, but I don't care what the price goes to; I will not sell that physical silver. It's there for a reason - just like I have insurance on my car, I have insurance in case of a disaster."
Owning physical silver also lets you side-step credit risk, which is an inherent problem to holding contracts. We'll get more into that later.
Another advantage to buying physical silver is low storage costs.
"[Silver and gold] are not very costly to store," Graham Davis, a professor of mineral economics at the Colorado School of Mines told Money Morning, "That's why they've been historically of interest to investors."
This is referred to as "value density," according to Money Morning Resource Specialist Peter Krauth. An ounce of silver, which you could hold in your hand, is worth roughly six pounds of copper, and about 21 pounds of zinc, by average 2014 prices.
Storing a large amount of silver will come with overhead costs, whether you choose to let bank vaults act as custodian, or you buy your own secure safe to keep at home.
As noted by JMBullion, a precious metals dealer, safes can cost anywhere from $100 to several thousand dollars.
Banks can also store your silver, but there are concerns about accessibility and security. The federal government has seized silver bank stocks before, and if this were to happen again, you could be deprived of your hard-earned investment.
Buyers also need to be aware that vendors will charge a premium on top of the spot price when selling physical silver. Silver retailers have to pay overhead to store and secure physical products, and premiums are a means of pricing these costs in. The total premium is determined by the quality and the silver content of a product.
You can, however, generally offset some costs of premiums by buying in bulk, as opposed to buying say, a single Silver Eagle coin.
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If these costs turn you off from buying physical silver, then maybe paper silver is a better fit for your goals.
Paper Silver (for the Conservative Investor)
Paper silver can be categorized in a couple of ways.
The first is silver exchange-traded funds (ETFs), which are funds that move with silver markets and can be traded like normal stocks.
And then there are futures contracts, which promise the future delivery of a certain amount of silver at a later date, and will move up and down in value based on the number of buyers and sellers in the market for silver futures.
Silver ETFs may well be the easiest, most cost-effective way to get exposure to silver, and are great for a conservative investor.
The most popular silver ETF is the iShares Silver Trust ETF (NYSE Arca: SLV). The fund backs its shares with about $6 billion in physical silver in JP Morgan Chase & Co. (NYSE: JPM) vaults in London and New York. Each share represents the price of about one ounce of silver.
The ETFS Physical Silver Shares (NYSE Arca: SIVR) is less popular than SLV, but it has SLV beat in cost-efficiency. Management fees peg SLV's expense ratio at 0.5, while SIVR is a reasonably lower 0.3.
In addition to expense ratios, there's one other downside to these ETFs: you don't own silver, and shares don't entitle you to owning the custodian's silver.
That's because these are essentially stocks. In the same way you can't redeem a company's hard assets by buying shares, you can't redeem physical silver with shares in either SLV or SIVR.
That's where an ETF like the Canadian Sprott Physical Silver Trust (NYSE Arca: PSLV) comes in handy. You can redeem shares for physical silver while taking advantage of the convenience of an ETF.
The only problem is that PSLV makes you pay a premium above the spot price of silver as well. And that premium can be extremely volatile.
Paper Silver (for the Risk Takers)
If you're looking to take advantage of the low-cost, high-reward game of silver investing, there are a couple of ways.
Both are, however, riskier than owning physical silver or buying up shares in the standard silver ETFs.
The first of which is to buy a leveraged silver ETF like the ProShares Ultra Silver (NYSE Arca: AGQ). AGQ seeks to double the performance of spot silver.
This could magnify gains, though the risk comes in that it can also magnify your losses.
And what's more, it thrusts the conservative precious metals investor into the thick of the financial system, which is often what silver investors are looking to avoid.
You see, ETFs like AGQ can't double the performance of silver simply by sitting on the physical product and holding it in vaults.
They have to hold futures contracts, and seek to capture gains trading derivatives. If you're (understandably) wary of the often confusing derivatives market, you're better off buying into the safer ETFs that only look to follow silver's movements.
If you're willing to take on even more risk, there's another option...
You can eliminate the middle-man and trade futures contracts on your own as a speculator.
"Futures contracts are a great way to gain leverage on the silver price," Krauth said. "Investors control many more silver ounces through leverage by requiring only about 10% margin of the value of the 5,000 ounces under contract."
Futures contracts, traded on the COMEX, promise the future delivery of 5,000 ounces of silver, generally at a warehouse or storage facility outlined in the contract.
As a casual investor, you will likely not be able to be reasonably afford and store that much silver, which is why you will only be trading the contract representing it.
Silver futures trading requires that you set up a margin account and plunk down a portion of the cost of the product.
If the price of silver moves up, you can look for someone willing to buy that contract at a higher price and pocket gains. If the price goes down, you'll see the futures contract decline in price. If it declines enough that your account dips below the margin requirement, you'll be forced to put down more money into the account.
And exchanges can adjust these requirements.
"The exchanges can increase the minimum margin requirements, requiring contract holders to pony up more funds or sell," Krauth said.
And that's not the only risk.
"There's also the cost of rolling over expiring contracts to new ones with later expiries, in order to maintain exposure," Krauth added.
Futures contracts are only held for a certain period of time, and you will need to rollover your position into another futures contract for a later month, otherwise you'll have to take delivery of the product and foot the astronomical bill of 5,000 ounces of silver (at the time of writing this, that's more than $80,000).
And there's an even bigger credit-risk when it comes to the futures market.
"It's only paper, and I fear at some point a futures exchanges could default if too many contract holders ask for delivery at the same time," Krauth said. "By some estimates, there's only one physical silver ounce for every 100 paper ounces outstanding."
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