Investing in silver has been a tough battle in recent years, and the plunge in commodity prices almost across the board in that same time hasn't done the white metal's price any favors. Yet now, many investors think that silver has bottomed out, and its big price bounce in early 2016 has many people convinced that a return to better times is near. But many wonder if silver is a good investment, and why one way of investing in it might be better than another. Let's go through some basics on how to invest in silver to see whether the sector should be of interest to long-term investors.
3 ways to invest in silver
In general, you can invest in silver in three different ways. The most obvious is to buy silver bullion directly. Coin and precious metals dealers sell silver bullion both in person and by delivery over the internet, and you can get quantities of anywhere from one ounce to a 1,000-ounce bar fairly readily in the silver market. The advantage of bullion is that once you have it, its value is well-established and matches what's happening in the silver market precisely. The downside, however, is that dealers charge markups to sell you silver, and if you want to cash in your bullion later, the dealer will often give you substantially less than the prevailing purchase price.
Second, securities related to silver trade on stock exchanges. Silver mining stocks offer exposure to the silver market, typically rising in value when silver prices go up and falling when silver performs poorly. Since you can buy or sell stock whenever the stock market is open, mining stocks have the virtue of being more liquid than physical silver. However, miners leave you exposed to the operational business risks that a particular company faces, and if something bad happens to the company whose shares you happen to own, then you can suffer losses even if silver prices are rising. To counteract this, you can instead buy shares of silver bullion ETFs on stock exchanges. These ETF shares represent interests in physical silver bullion, tracking the price of silver and offering better liquidity than physical coins and bars, but also carrying annual expenses charged by the ETFs.
Finally, silver streaming companies offer financing to mining companies in exchange for interests in their production. These companies don't mine silver themselves, but the capital they provide allows their mining-company customers to produce silver of their own. Streaming companies accept repayment for providing capital by buying silver from the mining company at a negotiated price that's usually far less than the prevailing market price. That gives the streaming company exposure to changes in the price of silver, but they don't have to deal with the hassles of mine management.
Is silver a smart investment?
Silver is an interesting commodity because it combines elements of precious and base metals. With silver trading at just 1% to 2% of the price of gold, it's hard to consider silver as a true precious metal, but its historical significance still makes silver a key part of the precious-metals group in most investors' eyes. At the same time, though, silver has more uses in the industrial sector than most other precious metals, and its value therefore is more linked to the business cycle globally than you'll see for gold.
The challenge with investing in silver is figuring out ways to make your investment grow. If you just buy a hunk of metal, then your only hope for gains is that the prevailing price in the silver market will rise. That could happen, especially if you expect the global economy to get stronger in the near future. But it's also quite possible to suffer big losses if supply and demand factors move against you.
By contrast, investing in mining stocks and streaming companies has risk, but the profits that they generate can be more valuable. A few mining stocks even pay dividends, and while those payouts are typically modest, they point to the ability to make money in the business. Focusing on low-cost providers is essential in order to weed out financially vulnerable companies that could face catastrophic problems if silver prices remain low for an extended period of time.
For streaming companies, the key to success is finding companies with the leverage to negotiate lucrative deals. Opportunistic streaming companies can benefit in times of weakness for the mining industry by offering valuable capital on extremely favorable terms. Others won't do as good a job of making lucrative deals and will therefore lag behind their stronger peers.
Investing in silver is risky, but the right moves can result in big financial rewards. Focusing on the companies that make smart silver decisions on their shareholders' behalf often ends up being more lucrative than simply buying bullion and hoping for silver prices to move in your favor.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.