Silver Bar 101

A silver bar is a rectangular piece of silver with even thickness. Silver bars come in difference sizes but their weight are often standardised into these sizes, 1 oz silver bar; 5 oz silver bar; 10 oz silver bar; and 100 oz silver bar. Larger silver bar does exist but their weight is usually not standardised as with the smaller silver bars mentioned above.

Any mint can make silver bars since they don’t bear any legal currency. The value of the silver bar is largely determined by the silver bars silver content. Every silver bar is stamped with the mints hallmark, the purity of the silver contained in the silver bar, and the weight of the silver bar. This information is there to make it easier to evaluate the silver bar. The size and shape of silver bars make them easy to transport and store, reducing handling and storage cost for both buyer and seller.

The silver bar is the perfect format when selling silver to industry, and large investors and silver depositories. Industry rarely uses silver in its original format. It is usually melted down and used in components and alloys; dissolved in acid baths and used for silver plating; pressed and shaped into jewellery and other pure silver products; etc. Large investors and depositories are interested in getting as much silver for their money as possible, and to do this they buy silver in the format of a silver bar. In this way they can acquire silver with prices very close to the spot price. They also greatly reduce their associated cost with storage, handling, transportation, etc. since a large silver bar takes up less space; are easier to transport; and easier to handle, than several smaller silver bars or silver rounds/coins.

With a silver market that is growing day by day, more and more silver mines are turning their focus towards the private investor, who is now offered countless silver products from mines all over the world. Since the silver bar in most cases easily beats both the silver round and silver coins on price, this makes the silver bar an easy decision for many silver investors, but there are certain aspects of the silver bar you need to be aware of before buying, like e.g: 

Silver bullion products, as the silver bar, is not tax exempt in the EU. A VAT of between 7% to 25% is added on all purchases of silver bullion products, making silver bars a very unattractive  investment for EU’s 730 million citizens.

Since a silver bar can be made by any authorised mint, there are many “un-popular” silver bars on the market. Even though the price of these silver bars are seemingly low, bear in mind that they can have a very large spread and can be very hard to sell, making your investment very unprofitable.

Buying large silver bars can also seam like a good deal, due to the reduced premium, but if you cannot diversify your silver entry and exit, and rebalance your silver investments as planned, a large silver bar vs. several small ones, can prove to be the least profitable option.

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Precious metals, a liability?

As stated by most financial gurus, one of the most important aspects of investing is to know the difference between assets and liabilities. Not knowing the difference, or simply ignore that an investment is a liability, can result in it being very hard for you to generate solid returns and a good cash flow on you invested capital.

Investors like Robert Kiyosaki continually bombards us with the message that your house is not an asset, it’s a liability, and in most cases he’s totally right in saying so. Because if we uses his wife, Kim Kiyosaki's definition of what’s an assets and what’s a liabilities we can see that, "An asset is something that puts money in your pocket, whether you work or not". So, with that clear, what is precious metals, assets or liabilities?

Even though there are exemptions to the rule, like gold lending and such between major financial institutions, physical silver and gold is not to consider as assets. I’m not saying you shouldn’t hedge your investment portfolio with precious metals and other commodities, I’m just saying that precious metals in its physical form, and most other forms as well, take money out of your pocket. Precious metals rarely generates a cash-flow for the owner. On the contrary, it usually generates an expense flow. First you have the up-front expenses, like the premium above spot, delivery, and money transfer cost, second you have the storage cost, and if you don’t have any storage cost (because you store it at home, etc.) your precious metal cash-flow will in best case be zero.

It think it was Albert Einstein who once said that, “Compound interest is the 8 wonder of the world”, and I very much agree with him. Take Warren Buffet, one of the worlds richest investors, he has amassed his wealth by acquiring income generating assets throughout his career. So what we want is to have as little capital tied up in precious metals since they are liabilities.

But if silver and gold are so bad for our cash-flow, why do we want them at all?

That is because they are very good hedging instruments against stocks, which is for most investors  their largest asset group.

The hedging mechanism of precious metals is simply explained as follows:

When the market experiences financial uncertainty, people get more cautious with their investments. The market picks up this as “the public has lost thrust in the market” and prices on stocks and houses starts to drop. People start looking for hedges and safe storage instruments for their currency and the proven hedge throughout time (if we are to believe the experts) are precious metals and commodities. And the earlier you shift you money from stocks, during a crash in the stock market, and into hedges like precious metals, the more currency you can save, or even better, make on the whole situation.

The problem here is of course timing. It is very hard to predict a market crash.

That is why the best strategy for most investors is to diversify their investment over several investment instruments, such as bonds, stocks, real-estate, cash, and commodities like gold and sliver. The price we pay to keep our investment safer, is to put some of our hard earned cash into liabilities, that hopefully will act as a hedge in the event of market collapses and crashes. But diversifying and rebalancing our portfolio continuously we dont’t have to worry about timing and market crashes since the loss in one category will be counterbalanced by another category.

Should I Buy Gold or Silver?

When investing in precious metals we are faced with one major decision, should we buy gold or silver? If we invest in the wrong metal at the wrong time, we could miss out on some serious profits, or even worse, we could see our investment dwindle to just a fraction of what it once was worth, while forever waiting for the prices to rise again. For me the solution to this problem is quite easy, and it has all to do with diversification and rebalancing.

Diversification is the mechanism of spreading our investments both over time, investment instruments, and volume, and as I will explain later, this is to our advantage when liquidating and rebalancing our gold and sliver investments.

But how can diversification help me choose if I’m to invest in gold or silver?

One of the ways to implement the principle of diversification is by spreading you investment over several items, instead of only one. This is one of the most common ways of using the principle of diversification within precious metal investing, since the price ration between gold and silver is so big. As you will see in the example below Jill gets 50 times more silver than Joe gets gold.

Lets take the example of Joe and Jill. They both have $10 000 to invest, and their investment portfolio is as follows:

Both Joe and Jill have invested in all the categories except one, gold and silver. We can now observe their different investment tactic in this category and the result of it.

First up is Joe, he’s unaware of the principle of diversification and with the gold prices at the time being $1000/ozt, Joe thinks it’s a smart idea to invest his 10% of the portfolio ($1000) in one single gold coin.

Jill on the other hand has both heard and read about diversification, and its many advantages, so instead of following her friend Joe’s example of putting all his eggs in one basket, she decides to spread out her investments of $1000 over a larger volume. She therefore buys 50 one oz silver coins, with the price of $20 each at the total cost of $1000.

Joe and Jill’s portfolios are scheduled to be rebalanced every month, to keep the correct proportions between the 4 investment categories. Since the last rebalancing neither Joe or Jill has had any increase of asset value in the stock, bond, or real-estate category, but both silver and gold has had an increase of 50%. This is good news for both Joe and Jill, however Joe has a problem with rebalancing his portfolio.

Since Joe only has one gold coin in his gold & silver category, he is forced to sell his entire gold holding of one gold coin, for $1500. He then has to buy back 7 gold coins, weighing 0,1 oz each, at the total sum of $1050. The $450 he made on his gold that month ($1500 - $1050 = $450), he then spreads proportionally over the other categories to keep his portfolio in balance.

For Jill and her diversified silver investment, the story is quite different. The only thing Jill has to do is to sell 30% (15 pcs) of her silver coins, and spread the earnings of $450 proportionally over the other categories, so that her portfolio is in balance. Since Jill only has to sell, unlike Joe who has to first sell, only to then buy back a proportion of what he sold, Jill’s rebalancing expenses is much lower than Joe’s. By using the principle of diversification in volume, Jill has therefore had a greater return on her precious metal investment than Joe.

As we can see from the example above a good way to maximise our return on silver and gold investments is to diversify in volume so that we can rebalance our portfolio for the lowest cost possible.

A rule to thumb I used when I started to invest in precious metals was “Start with small silver investments before I make big ones. First then, will I commence with small gold investments before I increased those to bigger ones”.