The following post is by David Parker from www.easy-forex.com.
Silver investing is a great way of entering the commodities markets as it allows traders to diversify their investment portfolio with a safe haven asset. It also has the added attraction as it goes through periods of volatility giving great trading opportunities. With the change of chair of the US Fed we could see some interesting trading for silver.
Since the beginning of the latest global financial crisis in 2008, the number of investors who went in search for alternative investments grew dramatically. The downhill slide of several stock indices and shares, together with ever present volatility in the financial markets, pushed many traders to consider investing in safe haven assets. Even though silver is viewed by some as ‘gold’s poor cousin’, it remains as one of the most traded precious metals. Like its cousin, it is used as safe haven investment by traders who want to diversify their portfolios and add some relative stability. Demand for silver is relatively constant as it is a component used in manufacturing, jewellery, photography, and even medicine because of its conductivity and strength.
Even though it is produced in most countries, more than half of silver’s global production comes from the East (China and Australia) and Latin America (Mexico, Peru, and Chile). Silver is a commodity used for both industrial and investment purposes but in recent years most of its demand comes from the industrial sector. According to The Silver Institute, as of 2010 the industrial demand of silver has been more than 50% of its production and hence its price is mostly driven from there. It is estimated that this percentage is likely to increase in the future as technological advancements may find more uses for silver in electronics, cars, and the solar power industry.
Entering the silver market can be achieved by two main methods – either though physical purchase of silver or by investing in exchange-traded products. The purchase of physical silver is always more fulfilling because it puts the actual metal in the investor’s hands but it comes with a variety of costs from storing and insuring it, and even costs when selling it. Probably the most common method of silver investment is through Exchange Traded Funds (ETFs), where traders get all the benefits from investing in silver without having to store it, however ETFs have more price volatility. A trader wishing to stay away from both high price volatility and physical silver ownership may look to invest in silver mutual funds. These portfolios may be combinations of different silver mining stocks and physical silver ownership which diversifies the risk. The downside with these funds is higher trading costs and the investor should have some knowledge of the stock market.
The sharp rise of silver prices during the first eight years of the 21st century was mainly due to the vast demand from emerging markets such as China and India. However, the last few years’ recovery of the European and U.S. markets, together with the slowing down of China’s growth, pushed silver prices very low. The ongoing speculation for the U.S. economy outlook and the future moves by the Fed as regards to the slowing down of its asset purchasing program are expected to be the main driving factors for the price of silver. The imminent appointment of Janet Yellen as Fed Chairman might be the beginning of a different approach to the U.S. economy’s Quantitative Easing (QE) program, and any holding back from further easing of the QE program may lift silver prices upwards.
As with any investment, traders should commit to researching for insights about silver before investing any capital. Silver was regarded as a symbol of wealth and prosperity but now new technologies require increasing quantities of the precious metal for the production of many products. Investors can enter the silver market in many ways and should always keep in mind that it’s going to be an exciting ride.