Unless you are a huge investor, buying silver directly from the silver market, the buying and selling of silver takes place in a retail setting, the buying of actual physical silver that is. This is true of all precious metal buying and selling.
Table Of Contents
- The Massive Spreads With Retail Silver Brokers
- Why Would Investors Hold Physical Silver Anyway?
- Ways to Buy Silver
It’s not even that you can avoid buying it through a third party anyway and even huge investors do so, although the difference is that if you’re spending millions of dollars, the markup per unit is going to be a lot less than if you’re spending much less.
There are always third parties involved in financial transactions, but if these third parties are retail dealers, as is the case with silver, you can bet that the markup will be significant, akin to what you usually see in a retail setting.
The dealer buys the silver wholesale, which is in itself marked up to a certain degree, as we see with wholesalers of anything really. The retail dealer then has to mark up the silver further, in order to cover their costs and make a profit, meaning that you are covering all of the costs of the retail operation, the payment for the location and space, the utility costs, the staff, maintaining the inventory, and so on.
Most silver transactions are for negligible amounts, an ounce to 10 ounces, and these are the sizes that retail silver deals will have the most inventory with. You can buy 100 ounce bars or larger at some dealers, and while the markup does tend to be less of a percentage with larger sized bars, they are still pretty significant.
You can buy silver and need to see the value go up 30% or more in order to break even, because when you sell it, there’s a markup for that as well. Markups for silver range from 10% to 30% or more depending on the quantity and the dealer, and this markup will always affect your ultimate return.
This is true even if you have no present plans on selling it, because at some point you will pay the full spread, unless you hold the silver until you die, in which case your descendants or whomever ends up selling it back in the end will pay the other end of it in order to complete the transaction.
The Massive Spreads With Retail Silver Brokers
With this said, the more silver you buy, the smaller the spread, but for almost all investors, we’re talking huge to merely very big, in terms of the size of the spread that we tend to see with securities in general.
Paying a full percentage for instance for a spread with a security, for a round trip transaction, would be considered very excessive these days, and to compare, you can pay as little as 0.02% for a precious metal trade with some contracts for difference brokers, and even 10% is a full 500 times larger.
Trades for contracts for difference or in the futures market almost always just occur on paper, you don’t ever take delivery of the silver, although with futures you could if you desired, but this illustrates the far greater efficiency of taking positions in silver without actually taking possession versus being delivered the actual silver.
Needless to say, when you take a position in silver or in anything that requires you to see the price of it climb as much as 40% before you even break even, this is going to require you to take a longer term position with the metal.
This might seem appropriate enough if that is your true intention, but along the way, you are exposed to market risk, and there may come a time where you wish to exit the trade in spite of your original intention.
You still can do this, but your net position will be reduced by the trading costs, which not only include this extremely high spread, they also include shipping costs each way, as well as any applicable storage and insurance costs.
Therefore, the decision to liquidate your position will need to be made with extra consideration, which usually ends up seeing people hesitate more than they should, resulting in even bigger losses or smaller profits than they would have intended had they not had to pay so much for the trade.
For those who insist on buying physical silver or any other precious metal from dealers, it is best, and it only makes sense, to see these transaction costs as sunk costs, and after calculating them into your net position, including the costs of selling, to not let these costs influence your decisions further.
Once the order to buy has been placed, and the order can no longer be cancelled, it is too late to worry about such things as the deal has been struck and we must then look to execute whatever strategy we have planned for this trade with the level headedness it requires.
Why Would Investors Hold Physical Silver Anyway?
In the early days, before contracts for difference, before exchange traded funds, before electronic trading, before you could roll over contracts endlessly in the futures markets, investors who sought to trade in silver had no real choice but to buy physical silver.
That all has changed though, although there still may be reasons why people may wish to own physical silver. The only one left that makes any real sense, or at least potentially does, is to hedge against extreme economic conditions.
Some investors get peace of mind from such a hedge, and it’s hard to put a price on that objectively. As well, if the marginal utility of one’s holdings were low enough, if one was very wealthy for instance and the amount of money devoted to the silver hedge is pretty much meaningless, given that they had way more than enough money to live out their lives as comfortably as they wanted to anyway, they may want to protect this lifestyle come what may.
Beyond that, we need to look at the cost of the hedge versus the probable benefits, and also realize that massive economic change doesn’t tend to happen overnight, and one does have time to adequately prepare for it.
We have witnessed some pretty severe economic conditions in some countries, where they even close the banks, but none of this happens without warning, and a lot of warning.
The decision here therefore is not so much whether we will ever need such a hedge, but rather, to what extent do we need it now? Again though, there are potential psychological benefits that need to be accounted for with some investors, and it’s their money so if they feel they get the value out of the opportunity costs involved with physical silver, this is purely up to them to decide.
Other than that, some just feel happier owning and possessing silver over buying securities that track it. There is usually some risk aversion here, and at least some of it may be sound, for instance the potential for the silver fund to go bankrupt.
Ironically, there was a precious metal fund that did, and the losses that the investors incurred was similar to typical trading costs of physical silver, meaning that the proposition seems to be that if this happens, you end up with the same result as physical silver, so you aren’t hedging anything really.
With all this said, one may still desire and perhaps even make sense out of buying physical silver, but these days, it almost always makes a lot more sense to leave the silver buying to those who have the buying power to obtain it much more efficiently than almost all individual investors could ever hope to.
Ways to Buy Silver
Silver comes in three main forms, bars, rounds, and coins. Coins generally are marked up even more than silver bullion, the bars and rounds, due to the extra that collectors are willing to pay for them.
If you are a coin collector, this probably won’t bother you, as you presumably get fair value for this additional markup due to your preference. Those who are buying them purely for the silver content are usually better served buying bars.
Silver coins are a bit more liquid, although dealers really don’t mind buying bars and have no real preference these days, as opposed to the old days where if you took both into a local dealer, they would have preferred the coins as they could sell them to their local clientele more readily.
Some believe that silver coins have more value due to their having denominated value, but this value is always significantly less than the value of the silver and there’s no reason why anyone would want to use these coins as currency anyway unless one was in a truly desperate situation with no recourse.
Silver is also bulkier than gold, given that an ounce of it is only worth around $17 these days, compared to the over $1200 an ounce that we see gold trade at, so you are going to need a lot more weight in silver to cover a certain investment amount than you would with gold.
This also affects shipping costs, where weight is generally an issue, and this can increase the costs to both buy it and sell it, provided that you don’t buy it locally.
Many banks offer precious metals though, and if one can be found locally, this can at least reduce the costs of buying, but they generally do not buy it back and this usually needs to be done through a major dealer, where shipping will very often be required, unless there is one located within your city.
Aside from buying silver for novelty reasons, those looking to do so need to carefully consider the reasons behind their desire to do so, along with how well more efficient alternatives to buying it may serve their needs instead. While it may sometimes make sense to buy the physical silver, in most cases, it does not, and a lot of people do so without due regard to what may actually serve them best.
Monica Stankowski
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
Topics of interest: News & updates from the Office of the Comptroller of the Currency, Forex, Bullion, Taxation & more.
