Paper Silver

If you are bothered by the troubles of investing in and keeping physical silver, the good news is there is paper silver that allows greater liquidity than holding the physical silver, and lesser maintenance for taking care of your physical silver such as storage and cleaning.

silver-etf-rise

Paper silver is more appropriately known as Silver ETF (Exchange Traded Fund). A silver exchange-traded fund invests primarily in raw silver assets. These assets are taken care by the fund manager. The silver ETF fund manager plays a similar role like unit trust fund manager (such as Public Mutual Fund). There are many silver ETFs in the international market. The physical silver held by these funds are more than 1/3 of the world’s total annual silver production. The largest silver ETF in the market is iShares Silver Trust, the 1st ever silver ETF was introduced in 2006.

The whole idea for the invention of silver ETF is to allow investors to invest in silver, conveniently.

Although silver ETF gives you high liquidity and little hassle, there is always some tricky parts. Theoretically, each share of the ETF should represent specific amount of physical silver in storage. Unfortunately not all silver ETF are backed by physical silver. When you invest in silver ETF, you are investing in the shares of the fund instead of the physical silver.

etf

Let me gives you another example using real estate in local context. In real estate industry, we have a similar concept being practiced known as REIT, Real Estate Investment Trust. Essentially, REIT is backed by physical properties. Take example of SUNREIT (Sunway REIT). SUNREIT owns properties such as Sunway Pyramid Shopping Mall, Sunway Medical Center, Sunway Resort Hotel & Spa, Sunway Tower, Menara Sunway, Sunway Hotel Seberang Jaya, etc. However when you invest in SUNREIT, you DO NOT own any of these properties, you owns the shares of SUNREIT.

sunway

Now, let’s get back to silver ETF, when you invest in ETF such as SLV, you owns the shares of SLV and you do not have direct claim on the psychical silver.

david-morgan

The first and most important fact to address is that the Silver ETF and all ETFs, to our knowledge, are cash settled. This simply means that the underlying asset may be there in various forms, but the investor in the fund can only accept cash as payment. –David Morgan, silver-investor.com

OK, great! What is the problem here?

If your intention of investing in silver is to quickly turn RM1.00 into RM1.10 and sell it to reap some profit, then go ahead invest in silver ETF. In fact, you can invest in any share available in the stock market because the fundamental of the asset does not matter in this situation. As long as you could speculate on the right share, you would be able to achieve such profit. Fundamentals is not something that concerns you.

However, if your intention is of investing in silver is because you understand the fundamental of silver, realized how undervalue silver is and aware of the potential of silver in the future, silver ETF is not for you.

Why? When you invest through silver ETF, every transaction is done through cash. Last month, during the sudden crash of silver price, investors are looking for PHYSICAL silver. Personally, I do not think last month shortage is a real reflection of the actual physical silver shortage problem. It is merely a scenario where physical market could not respond fast enough to the sudden demand. What worth mentioning is right after the crash, physical premium price shoot up noticeably.

The manufacturer, distributors and even your friendly dealers increased the premium because they wanted to slow down demand – simply because they do not have enough physical stock themselves. It is fair to say that when demand is up and there is no enough physical supply, premium will go up. In other words, the final purchase cost for physical silver is higher (or much higher) than the silver spot price.

silver bars

You see, when you invest in silver ETF, you are settling your transaction (buy / sell) through cash. You would not be able to get physical silver delivery. Which means even when there is a huge shortage of physical silver, you would not be able to take advantage of the silver you have invested.

For example, current silver spot price is $22, silver ETF price you have invested is $22 and physical silver price is $24 (where $2 is premium). When there is a shortage of physical silver, manufacturers, distributors and dealers would increase their premium say from $2 to $6. Now, spot price is still $22, silver ETF is still $22 but physical silver is $28. This might be an over-simplified example, but this is something identical to what happened last month during the suddenly physical silver shortage. The difference is, silver investors are expecting similar scenario at a much larger scale.

The real demand for silver is in the industrial demand. 2/3 of the annual silver production goes to industrial demand. You can’t give some silver ETF certificates to the industrial manufactures to produce TV, solar panel or water filter. They need physical silver for production.

To summarize this, if you do not like the trouble of investing in physical silver, the good news is there is silver ETF. Unfortunately the bad news is, there is no silver ETF in Malaysia. You need to buy the ETF in overseas, like buying an overseas share. The closest paper silver available in Malaysia is Maybank Silver Investment Account, it is not exactly a silver ETF but it is still one form of paper silver. You can find out more about my review on Maybank Silver Investment Account here.

Silver Malaysia eBookTo find out more about silver investment with Malaysian context, take a look at my eBook: Practical Guide For Investing Silver In Malaysia.

Property vs Silver

Property investment is a favorite subject for investors in Malaysia. Many investors have made good profit from property for the past few years and even more are desired to be part of the game. Property is the ultimate investment tool. Not only property provides cash flow but also capital appreciation that works for investors in passive manner. If you compare property with any other investments, property always comes out as the overall champion. So, how does property compare with silver?

Let’s compare property with silver in 3 different aspects:

Cash Flow

Property is a great tool to receive cash flow. Fundamentally good properties always have high rental demand and yield very good cash flow. The best thing a property investor could do is to divide a large apartment (or a double storey house or shop lot) into many partitions and start renting them out to maximize rental return. It is always more profitable to rent out smaller rooms than renting a property as a whole. The downside is, it is more work to rent separate small rooms compared to a whole unit. In silver, cash flow is almost non-existence. A silver investor do not receive any cash flow no matter what silver he invests in. There are precious metal investment programs that provide “interest” or “dividend” or any other forms that carries the similar meaning, but that often doesn’t end up well. In silver investment, the only exception that provides cash flow is to start trading silver as a bullion dealer. You buy a piece of silver for RM120 and resell it for RM135. That is a cash flow of RM15. Some might argue that is running a trading business and it’s not a investment. Well, renting out a property requires certain amount of work too such as renovation, arrangement for furniture, finding tenants, collecting rental, up-keeping maintenance, etc. In both property and silver, it depends on how much effort the investor wants to put in order to receive the cash flow.

Capital Appreciation

Both property and silver provide capital appreciation. For property, since 2008 till date, price has increased significantly. There is no absolute number to measure how much property price in Malaysia has increased as different locations, different types of property, or even different units of property in the same project might face different capital appreciation return. In property investment, there is also difference between asking price (the price that the property agent / owner wants to sell) and transacted price (the price that the new buyer bought it for) hence it is really challenging to provide an exact number how much property has appreciated since 2008. However if anyone has been following the increase of property price, it’s totally not surprising to find out property price has increased for anything between 100% to 150% since 2008. On the other hand for silver, since November 2008 until November 2012, silver price has increased approximately 200%. It is much easier to measure the appreciation of silver price by tracking silver spot price but nevertheless there are different type of premium for silver.

Leverage

In investment sense, leverage often means using OPM (other people’s money). In property investment, an investor has leverage of 1 to 10 ratio. Example, a person has RM20,000 can buy a RM200,000 property by borrowing the remaining 90% from the bank. Banks love to borrow money for property buyers as the loan is backed by a physical asset.  If you understand how a home loan works, banks charge the maximum interest in the early years and ONLY allocate your repayment to knock off the principle portion at the end of the loan tenure.

Any “misbehave” while serving the loan (such as defaulting payment for 3 months), the banks have the rights to raise your interest from -2.4% BLR to +2.5% BLR. If we take today’s interested rate at 6.6% and you are getting a -2.4% BLR, your actual interest rate is 4.4% (6.6% – 2.4%). If for whatever reason you could not pay the installment for 3 consecutive months, the bank could increase your interest rate +2.5% BLR which is equivalent to 9.1% (6.6% + 2.5%). From 4.4% to 9.1% in a more layman perspective, that means if you take a loan of RM200k for 30 years at 4.4% interest, you are paying approximately RM1000 as monthly installment. If for whatever reason the bank increases the interest rate to 9.1%, your installment will now be slightly more than RM1600. From another aspect, if your property value appreciate for 10% from RM200,000 to RM220,000, you are making 100% return from your RM20,000 down-payment. However when your property value depreciate for 10% from RM200,000 to RM180,000, you are making 100% lost on your RM20,000 down-payment. When that happens, really quiet a tough situation to be in. Leverage is a double-edges sword, it can cut your enemy, it can also cut you.

For silver, leverage is again almost non-existence. There is no bank that will borrow you to invest in silver. Well, when there is a will, there is a way. You can take a personal loan or use over-draft facilities to buy silver, but that is highly not recommended. The fluctuation in silver price is too huge to use a loan to invest for one simple reason: the interest on the loan is a constant (fixed) while the return is unknown. Silver price could go up and come down in different time of a day. There is no benchmark for silver price movement. Taking a loan to invest in property is a calculated risk (if you know what you are doing), but taking a loan to invest in silver is purely putting yourself in risk that has no form of systematic way to calculate the risk vs return. It’s just pure risk. This act is comparable to gamble away your money in Genting Highland!

Summary

It is rather challenging to define a clear winner in investment. However if we look into the minor details, property often comes out as the overall champion. So, why are we still looking into silver investment? No doubt property is the ultimate investment tool, the reason why we are talking about silver investment is because the cycle that we are in right now. The cycle for property is almost over, transaction is low, appreciation is not growing as the previous years, prices has gone way above affordability level. Silver on the other hand has tremendous upward potential, affordable where every middle class can afford to buy 1 oz of silver every month, and silver has strong physical demand in both industrial usage and investment demand.

Practical Guide For Investing Silver In Malaysia is a non-bias eBook written by Malaysian to Malaysian to show you why silver investment is such a great option and how to invest silver in Malaysia to maximize your profit, click here to find out more.