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Silver ETFs are a cheap and convenient way to access the silver market. The key advantage is that you don’t need huge amounts of capital to invest. They are traded readily during market hours on an exchange, just like shares. Pricing is transparent and it is relatively cheap to invest – you just pay a broker’s fee and an annual management charge to the ETF provider. That said, these charges aren’t as low as for equity index-based ETFs and may be 0.5%-0.6%.
There are a couple of different types of silver ETFs, we detail the differences below:
Physically-backed silver ETFs
The majority of the silver ETF trading on Canadian stock exchanges are “physically-backed.” This means that fund managers buy actual silver and store it in a vault to support the fund’s price. If you buy stock in the fund, then you theoretically own a little piece of that silver.
Silver mining company ETFs
There are also a number of popular ETFs that track the performance of a basket of silver mining companies. While the performance of these shares are influenced by the silver price, they will not track it exactly. Other factors such as labour costs, the political situation in the main silver mining regions of Chile, Mexico and Peru, and the success of the companies themselves will make a difference.
Silver has long lived in gold’s shadow. It’s less valuable, less globally significant, and the silver price has nevertheless tended to move in lockstep with the gold price. However, there are an increasing number of industrial uses for silver that have shifted the outlook.
This was seen in the recent COVID-19 crisis: as the gold price soared, investors might have expected silver to follow it higher. Instead, investors worried about the declining industry demand and pushed the silver price lower. In this way, silver has become more sensitive to the prevailing economic climate.
Other than just being pretty, silver has some key uses. Its main industrial use is in photovoltaics, which is the creation of solar panels. About half of demand comes from industry, with a much smaller share from jewellery, photography, silverware and investment. Supply is split around three-quarters mining and one-quarter recycling.
Investment demand is becoming more important, particularly from the ETF market, which is becoming a more popular way to get exposure to silver. It is estimated that the size of the silver ETF market is USD $18.95 billion.
There are several factors that influences the price of silver, including:
Gold and silver have historically had a strong relationship. Similar to gold, the price of silver has also tended to do well at times of political turbulence or economic uncertainty, giving them a silver lining. That said, the relationship is not exact and has been changing in recent years. For example, the price of gold significantly rallied throughout the COVID-19 pandemic. But the price of silver didn’t follow suit.
As with gold, supply of silver is limited. There is only so much that can be mined. If there is any interruption to the mining process, such as labour strikes, it will almost certainly raise the price. Silver mining is concentrated in the more stable countries of South America – Mexico, Chile and Peru – but may still be subject to political disruption. Equally, the price will be influenced by demand for jewelry and, increasingly, from industry. The delicate balance of supply and demand is an important factor in determining the silver price.
There are a number of new industrial uses for silver. More recently silver demand has risen because of its use in photovoltaics, which are used in solar panels. As demand for solar panels has taken off, it has provided support for silver prices. However, these technologies ebb and flow. For example, silver used to have an important role in photography, but this has declined as a result of the widespread use of smartphones.
Nevertheless, for many industries where it is used, it is often the only product that can be used due to its unique properties. Elsewhere, there are moves to replace silver with cheaper substitutes: aluminum alloys replace silver for some cheap mirrors, for example, while stainless steel replaces traditional silverware for many household items.
In good economic times, not only do people spend more on jewelry and silverware, there will be greater industrial demand. In recent years, silver has become more “cyclical,” meaning its movements are based on the health of the global economy. If incomes fall, luxury spending like jewelry may be the first to be deferred. This is particularly true for emerging markets, where demand tends to be greater. Recently, this has been a more powerful influence on the silver price than its status as a “safe haven.”
Along with all precious metals, silver doesn’t pay an income. That means there is an opportunity cost if investors can get high rates on their cash savings. This can dent demand for silver. As such, silver tends to do better at times when interest rates are lower.
In common with gold, silver is seen as an inflation hedge and a bulwark against a falling Dollar. The US dollar has historically had an inverse relationship with the price of silver. The recent weakness of the USD has benefited all precious metals as investors have looked for an alternative store of value.
Like gold, silver used to be a safe haven in troubled times. However, as its industrial uses have grown, it has come to be seen as a more economically sensitive asset – rising when industrial demand is high and people have cash in their pockets to buy jewelry. Aspiring silver investors will need to be alert to these shifting trends. Silver mining company ETFs can offer an alternative approach than those ETFs linked to the spot price of silver for different economic climates.
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