At The SHEES GOLD AND DIAMOND LLC DUBAI , our expertise lies in assisting clients in comprehending and navigating the intricacies of the Silver investment landscape. In this blog post, we concentrate on addressing frequently asked questions that our clients often seek guidance on.
For those delving into Silver investment research, we trust that the detailed answers provided will offer valuable insights and assistance.
Silver, like all commodities, experiences fluctuations in value in response to market conditions, influenced by shifts in demand and supply. The demand for Silver stems from four main sectors: jewelry, private investment, central bank reserves, and industry. Market conditions impact each sector differently.
Increases in the price of Silver occur when demand surpasses supply, primarily driven by consumer and industrial demand and market instability. Approximately half of the world’s mined Silver is used in jewelry. The substantial population growth in key Silver markets, particularly India and China, has propelled demand. Although industry requires less Silver by tonnage, the growth of hi-tech electronics contributes to a rising demand for supplies.
Market instability prompts private investors and central banks to purchase Silver as a traditional safe-haven investment during uncertain or declining market periods. The 2008 global financial crisis saw significant central bank demand, leading to a peak in Silver prices. Similarly, during the upheaval of the coronavirus outbreak in 2020, Silver reached an all-time high when the stock market faced declines.
Conversely, declines in silver prices occur when supply exceeds demand. Increased confidence among investors and central banks in market stability often motivates divestment from Silver. When investors anticipate continued global market growth, they may accept greater exposure to riskier investments. If the silver price falls below the economically viable extraction level, mines may close until prices recover, restricting supply.
The currency used to purchase silver also influences its price. The value of currencies, such as the British pound sterling, erodes over time due to inflation. Over the last two decades, the pound’s purchasing power has fallen against foreign currencies, effectively increasing the price of Silver in pounds sterling. Additionally, the relative value of a currency against the US dollar, a global reference and reserve currency, impacts the price of silver in that currency. These currency dynamics contribute to the overall complexity of factors influencing the price of silver.
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The value of silver, like all commodities, undergoes fluctuations in response to market conditions. While the ideal strategy is to buy when prices are low and sell when they are high, predicting all market moves is a challenging task.
Investors often turn to silver as a safe-haven during times of global financial and political instability, contributing to a significant increase in silver prices since the start of the millennium.
However, it’s essential for new investors to recognize that current prices are relative to recent market conditions and future projections rather than distant historical figures. Delaying or refraining from investment when prices are rising, in the hope that they will fall, exposes investors to the ongoing market dynamics that may continue driving prices higher. Making investment decisions based on a realistic assessment of current market conditions and future trends is crucial for navigating the complex landscape of silver investment.
The price of silver undergoes constant fluctuations, changing every few seconds during market trading hours. Referred to as the ‘spot’ price, it represents the live price of silver at a particular moment, primarily of interest to margin traders seeking to capitalize on minor price differences.
For investors, particularly those comparing silver prices over time, more pertinent are the prices declared at the middle and end of the trading day. The London Bullion Market Association’s (LBMA) ‘fixes’ are globally acknowledged as the definitive silver prices.
Numerous online resources provide access to spot and historic fix prices of silver, with the LBMA’s website standing out as an excellent and reliable source. Easy to navigate and rich in useful data, it offers investors a trustworthy reference for understanding silver prices and trends.
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Similar to all commodities, the value of silver experiences fluctuations in response to market conditions. However, the overarching trend is evident: the price of silver has been on an upward trajectory for over fifty years.
This upward momentum has notably intensified in recent years. In 2000, a troy ounce of silver was priced at £184, a figure that surged to £1,382 by the close of 2020. Even when adjusted for inflation, this represents a remarkable increase of over 345%.
The world’s burgeoning population continues to drive demand for silver in various forms, including jewelry, investments, central bank reserves, and industrial applications. Concurrently, the available silver yet to be mined is diminishing, with estimates indicating that less than 25% of global recoverable reserves remain unexploited.
While the current demand is met through mining existing reserves, this supply is not inexhaustible. In the long term, as the supply struggles to meet escalating demand, the price of silver is poised to reflect this imbalance through sustained growth.
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Diversifying investments is a well-known strategy to mitigate risk and enhance portfolio resilience. Financial advisors commonly recommend a diversified investment portfolio to spread both risk and potential benefits, reducing exposure to downturns in any single sector. This approach allows investors to maintain a mix of high, medium, and low-risk investments.
Financial advice is personalized based on the investor’s objectives and risk tolerance. It is not uncommon for investors to allocate a portion of their low-risk investments to silver as a hedge against other assets. While silver does not offer dividends or guaranteed returns, it often demonstrates an inverse relationship with equities, meaning it tends to rise when the stock market falls. This serves as a safeguard for investors against the risks associated with equities. The volatility observed in equity markets over the past two decades has led to silver significantly outperforming stocks, emphasizing its role as a valuable diversification tool.
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Incorporating silver into an investment portfolio can be achieved through two fundamental methods. One approach involves holding shares of silver funds, often referred to as ‘electronic’ silver. This method facilitates easy buying and selling of silver shares, but, akin to most investments, may incur tax liabilities and expose investors to potential counterparty risks.
On the other hand, physical silver represents a tangible asset. Some companies provide segregated storage options for maximum security, and certain types of physical silver may not attract tax liabilities. However, holding physical silver entails ongoing costs related to storage and security. Additionally, physical silver is less liquid compared to ‘electronic’ silver, requiring more effort if one wishes to convert it into cash.
Investors often weigh these considerations based on their preferences and risk tolerance when deciding between holding shares of silver funds and opting for physical silver in their investment portfolios.
The ‘bid/offer spread’ refers to the difference between the buying and selling prices of an asset. This spread is a common feature in all tradable assets and is comparable to the variation between the price at which you purchase a foreign currency at the post office and the (lower) rate when converting it back into pounds.
In the context of silver, the bid/offer spread implies that if you buy silver at a particular price today and opt to sell it tomorrow, you won’t recoup the same or higher amount than your initial investment unless the silver price has risen by a greater margin than the bid-offer spread.
To mitigate the impact of the bid/offer spread, long-term investors are generally advised to consider physical silver investments. Allowing the silver price to increase over time and then selling the investment can effectively yield a profit for investors.
For those who may need rapid liquidity or wish to respond to swiftly changing market conditions, some providers offer solutions. The Pure Silver Company, for instance, provides a Buy Back Guarantee on all silver purchased through them, offering investors a measure of flexibility and assurance.
Historically, recessions that have depressed the stock market often coincide with a rise in gold prices. For instance, during the bursting of the Dotcom bubble in the early 2000s, when the stock markets experienced a significant decline, gold held its ground, staving off the slump that affected overvalued stocks and even rose more than 10% during that period.
Similarly, in the most recent financial crisis that began in 2007, lasting for two years, the S&P 500 index lost 56%, and the housing market crashed on both sides of the Atlantic. However, the price of gold increased by a quarter during that time. It continued to rise for three more years as uncertainty and fallout from the global financial crisis prompted many investors to seek the safe-haven asset.
While the price of gold is a critical factor to consider during economic downturns, the safety of alternative investments is equally important. The last recession, the deepest since the Great Depression, saw significant financial instability, including the first run on a British bank in over a century and government intervention to prevent the collapse of several lenders. The FTSE 100 experienced sharp declines. It remains uncertain whether equities will be a safer haven for investors in the next recession.
Long-term financial forecasting, including predicting recessions, is inherently uncertain, and past performance does not guarantee future results. Investors need to assess whether the factors that typically drive the price of gold, such as political and financial instability, global upheaval, and demand from both private and industrial sectors, are likely to recur in the near future, regardless of an impending recession.
Silver’s historical status as a safe-haven asset for centuries serves as a strong indicator of its resilience during recessions. When other assets linked to the health of the economy face challenges in lean years, the inherent value and stability of silver often come to the forefront.
This doesn’t imply that silver always experiences only upward movement during a recession. Depending on factors such as the recession’s duration, inflation, currency values, and supply and demand dynamics, there can be fluctuations within the recessionary period. However, in general, recent history has shown that the price of silver tends to either maintain its value or outperform other asset classes during times of economic instability.
During the severe and prolonged repercussions of the 2008 great recession, for example, stock markets plummeted, while silver began a significant ascent, rising almost 200% in four years. The recession in the early 1980s and the Dotcom bubble burst of 2000 also witnessed an increase in the price of silver as markets declined.
The economic impact of the coronavirus outbreak, with the subsequent decline in GDP and bleak recovery forecasts, provided a boost to the silver price, which rose by 16% in 2020.
As with any investment, it’s crucial to recognize that past performance is not a foolproof predictor of future results. Investors need to assess whether the fundamental forces that historically propelled the price of silver during recessions will continue to be influential in the future.
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