Buying silver stocks: working methods and options
One of the ways to (indirectly) investing in silver, is investing in silvermine stocks. For investors who have experience buying stocks, this may feel like a logical choice.
But do silver (mining) stocks really match the goal you have in mind when investing in this precious metal? Or are you unnoticed taking extra risks that have nothing to do with the silver price itself?
In this article, we explain clearly what silver stocks are, what risks are involved and why more and more investors are choosing to invest in physical silver.
What exactly are silver stocks?
When someone talks about “silver stocks,” they usually mean one of the following three options:
- Silvermine stocks (shares of mining companies)
- Silver ETFs or trackers that follow the silver price
- Streaming and royalty companies in the silver sector (they finance mining projects in exchange for the right to buy silver (and gold) at discounted prices or receive a percentage of income)
Sometimes people don't mean an individual stock, but an ETF that tracks the price of multiple silver mine stocks. This is also known as a silver ETF.
The most common form are silvermine stocks: shares of companies that mine or process silver.
When you buy a silver mining stock, you own no physical silver. You own a share in a company. A silver mining stock is therefore an indirect way of investing in silver.
The price of a silver mine share is related to the silver price, but is also affected by:
- Company quality and stability
- Operational risks such as technical problems, floods, collapses and strikes.
- Production costs: The lower the cost per ounce, the higher the profit when silver prices rise.
- Geopolitical risks such as mining taxes, political instability and (environmental) legislation
The same kind of factors affect gold mining stocks.
How does investing in silvermine stocks work?
One silver mining company earns money by silver too winning, selling it and keeping the margin (sales price minus costs) as profit.
When the silver price rises, these companies' profit margins can also increase sharply. As a result, the price of silver mine stocks sometimes rises faster than the silver price itself. This is also known as leveraging mentioned.
| Example: |
|
The production costs of silver remain constant for the company at $18 per troy ounce.
The silver price rises from $25 to $32 per troy ounce. In that case, the gross margin increases from
$7 profit per ounce to $14 profit per ounce. In this example, the silver price rises by ‘only’ 28%,
while the profit per ounce doubles (100%).
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That sounds attractive, of course, but the leverage effect also works the other way around.
When silver prices fall, profit margins can evaporate quickly. Silvermine stocks can then fall much faster than silver itself.
The risks of silver stocks
- Business risk: Fraud, poor management or operational problems can undermine course.
- Market crashes: In 2008, for example, the price of silver fell sharply, but silvermine stocks fell significantly faster as investors sold stocks en masse.
- Cost inflation: Rising energy and labour costs are reducing margins.
- Political risk: Mining depends on governments and many silver mines are located in politically unstable regions such as Mexico, Peru and various African countries. New regulations can directly affect profitability (and thus the price of the silver mine share).
- You do not own physical silver: In times of financial turmoil, the difference between paper possession and physical possession is crucial. And with a share in a silver mine, you don't own any physical silver that you can have handed over, for example. For investors who buy silver to protect against systemic risk, this is an essential difference.
Buying silver stocks or investing in physical gold?
So if you want to invest in silver, there are different methods. Investing in silver mine stocks is one of those ways, but investing in physical silver is also a popular choice.
While both are related to the silver price, they differ fundamentally in structure, risk and objective. The overview below makes that difference clear.
| Feature |
Silver mining stocks |
Physical silver |
| Ownership |
A share in a mining company |
Physical silver in bars or coins |
| Link to silver price |
Indirect (via company performance) |
Directly linked to the silver price |
| Business risk |
Yes, depending on management, debt, cost structure |
No |
| Market risk |
Higher, more sensitive to stock market crashes |
Lower, not a stock but physical ownership |
| Political risk |
Yes, mines are often in politically unstable regions |
No, silver is stored in stable jurisdictions |
| Leverage |
Yes, profits can rise sharply with higher silver prices |
No, follows the silver price itself |
| Volatility |
Often higher than the silver price |
Follows the market price of silver |
| Counterparty risk |
Yes, dependent on companies and financial markets |
For allocated silver: no counterparty risk on the silver itself |
| Objective |
Returns, speculation |
Wealth preservation |
| Ownership type |
Legal share in a company |
Legal ownership of specifically allocated silver |
