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