How to Invest in Silver

Invest in SilverMy belief is that everyone should invest in silver. There is a long run bull market in commodities, in particular, precious metals are in a long run bull market driven by the loose monetary policy of governments. Silver has had a correction of late, as I right this it is about 20% off its recent peak, and this could serve as a buying opportunity.

This article looks at the different methods available for the average investor to invest in silver. All the investment vehicles mentioned are openly available and so if you want to invest in silver any of the avenues discussed should be easily accessible to you.

Considerations for anyone wanting to Invest in Silver

Invest in Silver in the UK- Tax Issues

Investing in physical silver in the UK attracts VAT. This means any purchases of bullion bars or coins will attract a 20% tax payment. This is not ideal, and buying in places where it is not taxed such as the Channel Islands will not save you as you will have to pay tax upon import to the UK. There are ways around this though, so if you want to invest in silver without having to pay the tax look at ETF investments. These are discussed further below and serve as probably the easiest way to invest in silver.

Invest in Silver Bullion Bars

If you want to invest in silver by physically buying bullion bars, 1kg is a sensible denomination, reputable refiners include Umicore, Metalor, Heraus and Engelhard. Remember you will have to pay a premium over the spot/current market price (the price is quoted per troy ounze) and because the silver market is small there may be occasions when this premium is quite large ie. greater than 25% due a supply squeeze. However, actually taking physical ownership of the metal is probably the safest way to invest in silver provided you buy from a reputable dealer.

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Invest in Silver Coins

If you wish to invest in silver coins do not be fooled by the market for antique or special issue coins. You should only be interested in the physical worth of the metal in the coin. As a result you can’t go wrong with Silver Eagles or Austrian Philharmonics which will be 99.99% pure, which is what you are after. If the banking system were to collapse, and you invest in silver as an insurance policy against such an event, one troy ounze coins would be a practical size. I note that with the current situation in Greece on a precipice and the impact on European banks being understated, a banking problem like in 2007/2008 is looking increasingly possible.

Invest in Silver ETFs

An alternative to holding the actual metal is ETF’s. An ETF is bought and sold through your standard online borker just like a share. An ETF investment would not attract the VAT and hence could be more cost effective for traders and shorter term investors. A good ETF is LON:PHAG which is denominated in dollars and is backed up by a physical holding of silver in a bank vault. Be aware though, that if you are holding silver as an insurance policy against the collapse of the banking system, an ETF would not be a wise place to put your money and a physical holding would be much more sensible. There are rumours abound that that the amount of claims for silver from ETF’s exceeds the quantity of physical silver available.

Invest in Silver “Perth Mint Certificates”

Furthermore, there is an alternative method of holding silver known as “Perth Mint Certificates”. Basically, you buy silver bullion which sits in the bank  in Australia and you are issued with a certificate showing your holding which you can sell when you desire. This method of investment still has the issue of you not actually taking physical ownership of the silver though, hence there is still the risk of the bank perhaps not quite having the holdings of silver to back up the certificates issued.

Invest in Silver- Summary

Overall, how you hold your silver should depend on your investment objectives. As an example, I hold a significant amount of silver bullion in the form of 1kg bars. I also hold the ETF LON:PHAG which acts as a much more short term vehicle to trade with, should I feel the need to “dance with the devil”, referring the fact that the market is notoriously volatile and difficult to call.

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I hope this article has served as a useful piece of education on how to invest in silver.

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DB vs DC Pensions

There are 2 types of pension which an employee can be provided with from his employer- a defined benefit (DB) or a defined contribution (DC) pension. The 2 are very different. For American readers a DC pension scheme is the same as your 401k plans.

What is a DB Plan?

In the good old days most employers provided DB pension schemes for their employees. Typically, employees were then entitled to a proportion of their final salary when they retired,  the amount they got was dependent on length of service. For example, a typical set-up would have been 1/60th of final salary for each year of employment. This would mean an employee who worked for a company for 40 years and enjoyed a salary of £40,000 would be entitled to a pension of £26,666 when he retired. I think you’ll agree that that is a pretty nice employee perk if you could still get it.

How is a DC Plan Different?

These days most DB schemes are no longer open to new joiners and most employees in the UK who sign up to an employee pension scheme will be signing up to a DC scheme. These are very less attractive beasts as the risks sit with the employee. The way they work is each employee is provided with a certain amount of pension contributions from his employer each month. Typically, if you contribute to the pension scheme yourself the employer will match up to a certain level your contributions. These contributions are then invested, normally through a life insurance company, into a set of investment funds which you will have chosen when you signed up to the pension. Based on the performance of the market,the value of your funds will go up and down and then when you eventually come to retire you will have a pot of money which will hopefully enable you to retire happily and contentedly with a nice pension income (please note- the rules regarding how you get an income from your pension pot are changing at the moment, how you go about doing this and what choices are open will be a topic for a later post).

Why are DC Plans Not So Hot?

1. In the UK you get tax relief on your pension contributions. This means you do not have to pay any tax on your pension contributions. The gimmick is however, that any income you do receive from your pension pot in retirement will be taxed. On top of this, given the state of some countries’ public finances taxes are likely to rise and hence you are likely to pay more in tax than you perhaps expected when making your retirement arrangements.

2. Make sure you know which funds your DC pension contributions are being invested in. I recently read an article which stated a third of people are on the default option, this means they are at the mercy of the “supposed investment expert” fund managers.

3. Look at the annual management charge which you will be charged to have your funds managed. Typically it can be anything up to 2%. These will massively cut into your returns if they are not minimised. One way of getting round these charges is to invest in index tracker funds, typically the management charge on these may only be about 0.5%. Tracker funds just match the market, for example you may have a FTSE 100 tracker fund which will just buy shares so that it matches the performance of the FTSE 100. Because these tracker funds do not require active fund management they’re cheaper to run.

4. One of my biggest gripes about DC pension schemes is that I do not think that pension investors are very well diversified. Yes, you can invest in shares throughout the world, in corporate and government bonds, and property shares but there are certain key asset classes which you can’t really get access too through a standard DC pension set up. These include commodities- yes, you can invest in commodity company shares, for example mining companies, but it is very different to actually investing in the underlying commodity directly such as copper or gold! As a result, I fear that although city fund managers claim they are investing in a diversified portfolio of assets, the reality may be that pension investors are not as well diversified as they may think. Consequently, a repeat of the 2008 financial crisis at a time close to retirement could be disastrous for some pension investors.

5. The government still has access to your pension funds, this should concern you a little. For example, during the 90′s Argentina and other Latin American countries suffered from a financial crisis, in the end to help bolster its coffers the Argentinian government seized the private pension funds of individuals. Given the dire state of the finances of some Western governments I would not completely rule this out.

Hopefully this article has cleared up the difference between DC and DB pensions and at the very least, if you are DC pension investor, opened your eyes to some of the issues.

Financial Education is Priceless

Look around you, look at the number of people who are completely reliant on their jobs for financial security. What if they were made redundant tomorrow, for the majority of the UK population they wouldn’t even have the financial resources to support themselves for 3 months.

The reality is even if you work for a large multinational you could lose your job tomorrow. I’m not trying to say this in a bad way I just want to encourage people to think about the bigger picture.  A “secure” job does not mean you have no risks as we saw with Lehman Brothers when it collapsed in 2008.  A lot of the workers at that large US bank probably thought they had a “secure” job.

In this day and age, jobs for life are harder to come by partly because of the current economic outlook and partly to do with technology. The internet means that jobs can be farmed off to countries like India, China and the Phillipines where jobs can be done for a fraction of the cost of Western Countries. This means that it is more important than ever to have something to fall back on. At the very least everyone should have 6 months worth of living expenses sitting in liquid assets- lets call this a financial security fund.

The other reason why people need to start thinking about their financial arrangements is because gone are the days when individuals worked for a company their whole lives and then got a pension until they died. These days people are living longer, much longer, for children born in this decade it will not be unreasonable to assume they will live to beyond 100. Governments in the Western world, on the other hand, are bankrupt, they cannot really afford to look after their citizens in retirement, what we will therefore likely see is that the value of government pensions will fall and fall in real value pushing hard working pensioners back to work or into poverty.

It is therefore so important that people get financially educated. They need to understand the importance of buying up assets and businesses which will be able to provide a source of income whether they can work or not.  To reach that level of financial education will be a long hard struggle, it will require significant effort and a change of mindset but if you do not start on that path you will be risking having a very poor retirement. As a start have a look at some of the suggested reading on this website. As this portal develops I will eventually have a whole program of assistance that can be offered to help you reach financial independence. It doesn’t matter if you are 20 or 65 years old the most important thing is start taking some action! Good luck.

Inflation vs Deflation

This is the hot debate in the investment community.

Deflation would favour fixed income investments and cash. Inflation would favour commodities, precious metals and resource related stocks.

For the UK I think inflation will be the problem. Our deficit as a % of GDP is one of the highest in the world, and even if the Conservative government push through all these spending cuts our deficit as a % of GDP will still be on a very unsustainable path. For the Eurozone I think deflation will be more of a problem because of the lack of any quantitative easing and the Eurozone’s inflexible exchange rate.

Compared to the size of our money supply the UK’s quantitative easing program was massive, larger than that of the US in relative terms. This only spells one thing, inflation.

There are few options remaining in order to solve this mess for the UK- we could default on our debt, we could inflate our debt away or we could depreciate our currency so that our debt commitments are worth less to foreign holders. I think we will see a combination of inflation along with a depreciating currency which means we will be importing inflation too!

To protect yourself from weakening sterling it would be wise to put some money in strong currencies- these include Norwegian Krone, Swiss Francs and the Australian Dollar. Exposure could be gained through foreign currency denominated accounts with high street banks, ETF’s, foreign denominated assets or simply holding foreign cash.

 

When to invest in Real Estate

There is a lot of talk about when is a good time to invest in real estate.

The actual answer is anytime is a good time to invest. When the market is tanking, as a buyer you can negotiate fantastic discounts, 25%-30% off market value is what you should be aiming for. On the other hand, when the property market is rising you get the benefit of rising prices.

As it stands the property market in the UK is being artificially held up through the rock bottom interest rates. I think it will be surprising for how long the Bank of England maintain rates at this low level because they know any rise will knock the UK’s economic recovery. Ultimately though, the outlook for UK property is poor and at some point I think there will have to be some further declines. Whether these declines will be in real terms or nominal terms we will have to see.

Gold and Silver

Everyone is talking about gold and silver at the moment, and whether or not they are in a bubble.

Ultimately people invest in precious metals as protection against inflation, protection against fiat currencies and protection from the government. At the moment it appears there is still a long way for the bull market to run as the markets have not gone parabolic.

Silver has had a brilliant run, reaching $49.50 per troy ounce at the end of April. I think there will be some consolidation around this price as silver has had a brilliant run, it however remains a hold for the long term.

If you want to invest in precious metals take a look at buying shares in LON:PHAU and LON:PHAG. These ETFs are backed by physical metals so they will closely match the value of the underlying metal. Remember they are denominated in USD though, so you may be exposing yourself to currency risk depending on what currency your liabilities sit in.

I will talk about owning precious metals in the form of bullion/ coins in a later post.

Welcome to Experimental Investor

The world is in a state of economic deterioration. I think it is inevitable that over the next few years we will see a higher inflation, weakening currencies and further real estate market crashes.

I am the experimental investor, I am seeking out investment opportunities in these tough times which I can use to build up my investment portfolio. Everything I talk about I am investing in myself.

This site will provide you with education, economic and investment news, and access to powerful material to help you realise your investment dreams, just like me!