The main ways of investing in silver are:
■ Silver bullion: silver can be purchased in the form of bars, as official coins and as medallions – round pieces resembling coins, although not legal tender.
■ Exchange-traded funds: investments can also be made through exchange-traded funds, which allow diversified holdings and ready liquidity in combinations that can include the physical metal, silver miners and refiners.
■ Futures and options: investors can buy futures or forward contracts, which are exchange-traded agreements to take or make delivery of silver at a fixed future date, although investing in futures is generally the preserve of major players or industrial users. Silver can also be traded as an option, which provides the right, although not the obligation, to buy or sell within a specified timeframe.
■ Mining shares: a key advantage of investing in silver through mining shares is that these often benefit from a gearing of the silver price on their reserves in the ground. This can boost the share prices of silver miners more strongly than silver itself when the metal price is flourishing.
THE COMPANY:
The share price of Arian Silver, the only primary silver producer on the Alternative Investment Market (Aim), rocketed more than 600 per cent over the second half of last year, rising from around 7p to over 54p as its San José mine in Mexico entered production.
It wasn't so much production prospects that boosted the shares, but more the fact that cash flows will fund an active drilling campaign to prove the potentially very large scale of the resource.
The current 43m-ounce silver resource is based on exploring just 10 per cent of the known length of mineralisation, and management believes that the vein could host over 200m ounces of silver.
Arian's shares have recently retreated to 40p, shadowing the metal price lower. Silver is often found in long veins and, if drilling proves the existence of a continuous vein at San José, the shares should substantially eclipse all previous highs.
SILVER FUNDS:
Exchange-traded commodities (ETCs) and exchange-traded funds (ETFs) are a good way to access silver, especially if you want to buy it in small denominations. These funds are listed on the stock exchange and as passive trackers their charges are much lower than those on actively managed funds; their total expense ratios are typically below 1 per cent.
However, as you will need to buy these through a stockbroker, you will have to pay the broker’s charge. For this reason it is better to hold ETFs and ETCs over the medium to long term, as the charges for frequent trading will eat into your returns.
ETF Securities offers the ETFS Physical Silver fund, which tracks the actual price of silver rather than derivatives or mining shares. If you want to spread your risk then you could consider the ETFS Physical PM Basket, for which silver accounts for nearly 30 per cent of assets, alongside gold, palladium and platinum. ETFS Silver tracks the DJ-UBS Silver Sub-Index, which is priced off COMEX Silver futures contracts. It reflects the return of underlying commodity futures price movements as it is backed by matching commodity contracts purchased from counterparties, and is quoted in US dollars.
This structure introduces a series of extra risks. Funds that invest in commodities futures contracts can underperform the commodity's spot price. Part of their return is made from selling futures contracts prior to their expiry date at a specified price and then reinvesting in more futures. If the price of futures has risen over the term of the contract, then the fund will have to pay more for the new futures than it gets for selling the ones it holds. But this can work in the ETC's favour if the price of futures falls over the given period.
Another risk is the swap counterparty, often a bank or insurance company. If this entity becomes insolvent or is unable to honour its obligation it puts the fund at risk, although in the case of ETFS Silver, the risk is mitigated because its payment obligations are backed by collateral covering 100 per cent of the daily mark-to-market value of the commodity contracts outstanding.
ETFS Silver, although listed on the London Stock Exchange, is also denominated in US dollars, so you take on currency risk. dbx-trackers, meanwhile, offers the db Physical Silver ETC, although its shares are denominated in US dollars rather than Sterling.
SILVER MINERS:
For exposure to silver miners, there are three options listed in London: Fresnillo and Hochschild Mining, listed on the FTSE 100 and FTSE 250 respectively, and Aim-listed Arian Silver. However, the prices of these are influenced by far more than the price of silver. You are taking on operational risk and extraction costs, and possible political and regulatory risk if these operate mines in unstable parts of the world. Even if these companies are doing well and the silver price is doing well, if the London market falls, their share price could fall with the market.
