Alongside bonds, one way of diversifying a portfolio away from equities is through commodities. Gold has enjoyed a strong year, but there are reasons why now could be a good time to invest in silver.
Silver prices have increased slightly over 19.9% in dollar terms over the past 12 months, and 20.3% in sterling terms. Silver lags gold during this period, but given that gold and silver prices have historically been compared in order to assess the investment appeal of either, this arguably strengthens the case for investing in silver.
Since hitting a peak in late October silver prices have fallen approximately 10.4% in dollar terms, and 8.2% in sterling, over the past month.
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This could present a buying opportunity, but there are several factors to consider when deciding whether or not to invest in silver.
The investment case for silver is distinct from gold. While it is, similarly, a precious metal with a rich history of usage in coinage, in the modern era it is silver’s industrial qualities that have the greatest bearing on its price.
“55% of annual demand [for silver] comes from industry or tech, compared to less than 10% for gold,” Adrian Ash, director of research at BullionVault, tells MoneyWeek. “Look around you; if something’s got an on/off switch, it most likely contains silver.”
Other industrial use cases include brazing and alloys, the chemicals industry and medical equipment – the latter benefiting from the fact that bacteria cannot grow on silver, an inert ‘noble’ metal.
For these reasons, silver “sometimes tracks action in copper prices more than the ‘safe haven’ precious metal”.
All of that said, many of the same drivers that impact the gold price – financial stress, interest rates, inflation expectations and policy decisions – also apply to silver. “Indeed, you can think of silver as gold on crack,” says Ash. “More irrational, more volatile, more dangerous; but also more fun if you’re looking for risk.”
Is silver a good investment?
As well as the industries above that have traditionally driven silver demand, Ash also highlights three “boom industries” to which silver is particularly relevant: renewable energy (particularly photovoltaic solar panels); artificial intelligence (AI), thanks to its use in wiring, connectors and switches; and defence, for the same reasons.
The rise of these industries is, potentially, contributing towards an imbalance of supply and demand for silver which should, over the medium term, be positive for the silver price.
According to The Silver Institute, between 2015 and 2023 annual demand for silver increased from 1.07 billion ounces to 1.20 billion. Over the same period, supply fell from 1.05 billion ounces to 1.01 billion. There is, in other words, a widening gap between the amount of silver required and the amount produced.
The boom industries are the main drivers of increasing demand. Total industrial silver demand increased from 457 million ounces in 2015 to 654 million in 2023, and that number is expected to jump by 9% to 711 million ounces in 2024. Electronics, particularly photovoltaics, is the largest driver of increasing industrial silver demand.
One thing to keep in mind when considering investing in silver, though, is its volatility. Futures and options speculators call it “the devil’s metal”, says Ash, on account of its propensity to make sudden, sharp moves just as they think they’ve figured it out.
“That's less of a risk for investors trading physical bullion at spot prices, but its volatility is still significant,” says Ash. “While that can bring opportunities, it can also leave you nursing losses for extended periods of time.”
Should you invest in silver or gold?
If you are considering investing in a precious metal like silver, you are probably also at least thinking about investing in gold.
The two metals function quite differently as investments. Gold lacks as many industrial applications as silver, but has historically been a more reliable store of value.
That said, their historical significance as precious metals used in coinage means that gold and silver are often directly compared by investors. The gold-silver ratio is reckoned to be the oldest continually-tracked financial ratio in existence. It describes how many ounces of silver are required to buy one ounce of gold.
The gold-silver ratio is approximately 88.2 at time of writing. Prior to this decade, anything above 80 would have been considered high, indicating that gold was overvalued and that it’s time to invest in silver.
However, the picture isn’t that straightforward anymore. The gold-silver ratio topped 112 briefly in early 2020, in response to the Covid pandemic, and while it fell sharply soon afterwards, it has stayed in the mid-70s or higher for the last three years.
The longer term trend seems to indicate that the gold-silver ratio is settling at a higher level than it has been historically. “The gold-silver ratio has averaged 68.1 ounces of silver per 1 ounce of gold since NYE 1999. That’s up from 57.1 across the prior 25 years,” says Ash.
Ash puts these elevated levels down to silver no longer serving a monetary purpose, “whereas gold continues to find strong demand from central banks wanting to spread their portfolio risk”.
That said, “many analysts expect some level of mean reversion in the gold-silver ratio, not least because repeated deficits of silver mining supply versus soaring demand should support if not boost prices for years to come”, he adds. If so, this could support the view that gold is overvalued compared to silver.
How to invest in silver
There are various ways to invest in silver.
You can, in theory, buy physical silver in the form of silver coins or bars. These, however, incur 20% VAT, and according to Ash will also include 10-15% dealing spreads on top.
“That simply isn’t an investment,” he says.
Specialist custodians such as BullionVault can enable you to avoid sales tax while cutting this trading spread too. Using a custodian should also save the expense and risk of storing and insuring physical silver on your own property, as they will normally store your silver in a professional level vault.
Alternatively, you can gain exposure to movements in silver prices by buying a physical silver exchange-traded commodity (ETC). An ETC behaves similarly to an ETF, but it tracks the spot price of a particular commodity, as opposed to a bundle of stocks. The iShares Physical Silver ETC (LSE: ISLN), for example, tracks the spot price of silver.
Buying shares in silver miners is another way to invest in silver. However, bear in mind that this is a different and arguably riskier investment than in physical silver or a tracker for the spot price, because while changes in the silver price will impact the share prices of silver miners, they are also exposed to other, unrelated factors, such as company mismanagement.
A combination of both these approaches would be to buy an ETF comprised of silver miners, such as the Global X Silver Miners UCITS ETF (LSE:SILV). While doing so may dilute some of the company risk associated with buying individual silver miners, this should still be considered a distinct play from investing in physical silver (either directly or via an ETC).
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