Investing In Silver Bars: A Beginner’s Guide

Ownership of physical precious metals is a proven hedge against economic uncertainty. Ownership of silver bars is a practical and popular way to gird one’s portfolio against hyperinflation and increase overall diversification. Silver is not highly-correlated with stock prices, though still tends to become more valuable over time. Silver can therefore help protect your investment portfolio and net worth during times of economic turmoil, when stock prices are down.

Silver shares a number of investment characteristics with gold: Both are precious metals that are readily held in physical form. Their prices tend to move in the same direction most of the time – but not all the time.

Like gold, silver bars and coins can both be potentially used as currency in the event of economic collapse.

But silver bullion trades at a much lower price per ounce than gold. It’s therefore much easier for novice investors and collectors to get into.

Silver has been on a tear recently, thanks to uncertainty in the stock market and industrial demand. Silver investors were forced to sell to cover margin calls during the stock market crash in the spring of 2020. But silver prices quickly rebounded by more than 50% within a few weeks.

Silver Premiums and Discounts

If you're just getting started in precious metals, it's essential to understand three concepts: spot prices, premiums, and discounts.

The term “spot price” refers to the current market price of silver determined by traders all over the world in the global marketplace.

If a given piece of silver, be it a bar, coin, round, or any other form, is bought or sold for a price that is higher than the current spot price at that time, it is said to be trading at a premium.

Likewise, if the silver item is trading at a price per ounce that is lower than the spot price, it is said to be trading at a discount.

Ideally, anyone who trades in silver should strive to buy at a discount to spot and sell at a premium. In practice, this is very difficult to do. Most good quality bars and coins will all trade at a premium to the spot price, simply due to the cost of mining and extraction, transportation, milling, minting and distributing the metal – along with building in a small profit margin.

Coins typically have more appeal to hobbyists and collectors than bars, and as a result, they are willing to pay a higher price per ounce for silver coins compared to bars. However, high-quality silver bullion bars and coins will still usually sell at higher than spot price. Smaller bars tend to trade at higher prices per ounce than larger ones.

Advantages of Holding Physical Silver Bars

• silver bars are compact
• easy to carry and store
• easy to hide
• Liquid – easily bought and sold all over the world at close to spot prices

Historically, silver has been an imperfect but effective store of value, retaining its worth in times of great economic uncertainty, hyperinflation, and collapse.

It’s also much easier for ordinary investors to buy practical amounts of silver than it is to buy gold, due to a much lower price per ounce. The entry price point is much lower.

Silver also has the advantage of being an in-demand commodity for a variety of industrial uses, which helps to support its price.

Related Article: The Case For Silver - What Investors Need to Know

Cast or Minted

When investing in silver bars, there is the option between buying cast or minted bars. Depending on the buyer, investors will have a preference of one or the other.

• Cast. These are usually simply-manufactured bars in which the silver is melted, poured into a cast, and then stamped with the manufacturer’s identity and the weight of the bar. No attempt is made to polish the metal, and there may be no decorative element at all.
  
  These bars are intended to be bought and sold for their weight in silver, and that's it.
  
  These bars can be excellent candidates for home storage or to travel with, as they’ll typically hold their value well even with some scratches or scuffing.
• Minted. Very beautiful ornate bars and bars from high-quality mints trade at a premium compared to plain cast bars. Those bars from established quality mints are easier to sell, and buyers will pay more for these beautifully-crafted bars – especially when they’re in good condition, free of scuffs and scratches.

Fakes and Scams

Some scammers attempt to create fake silver bars and pass them off as if they are real. In some cases, professional criminals have drilled or hollowed out larger bars and filled them with a lead alloy to deceive unwary buyers. These scammers typically choose the 50-to 100-ounce bars, as these are small enough to be commonly traded by amateurs who are unlikely to detect the fraud but large enough that the payoff is worth the effort and risk of getting caught.

If it's selling for way below the spot price, chances are it's a fake.

The first line of defense against scammers is a healthy skepticism regarding any offers to buy silver that is too good to be true. Anyone selling silver for more than 5% below the spot price for its weight is very likely a scam artist.

Another way to catch higher-quality fakes is through the use of X-ray machines. Occasionally, sharp-eyed dealers can spot drill marks on altered bars.

Fakes are unusual. But they are common enough that it’s a good idea to confine your purchasing to reputable dealers – especially if you are inexperienced.

Also, bars with a known provenance may fetch a premium price compared to bars off the street. Precious metal vault companies are more comfortable buying bars that have been in their possession for years, or that they themselves bought from a national mint or recognized dealer.

What to Look For in Silver Bars

These are the primary considerations for silver bar investors:

Weight: How much metal is in the bar? In the U.S., weight is typically measured in Troy ounces, which are slightly larger than standard ounces.

One troy ounce is equivalent to 31.1034768 grams. It also equals 1.09714286 avoirdupois ounces, or exactly 192⁄175. That is, a Troy ounce is about 10% larger than a standard avoirdupois ounce.

It's important to account for the difference when buying and selling precious metals.

Purity: How pure is the silver in your bar? How much weight is due to contaminants and other impurities? Government mints and high-end, established private mints are able to manufacture to a very high and consistent purity. Some lower-end mints and private silversmiths are not so consistent.

Refinery. High-quality mints and refineries will stamp their names on the bar. Products of well-known, high-quality refineries will sell at a higher premium than those from lesser-known ones.

Serial number. You should see a serial number on each bar – at least from established mints. Some backyard silversmiths making novelty items don’t number their bars, but these are lower-end products. You may have more trouble selling these, as buyers may demand an assay before purchasing, or only be willing to buy at a steep discount.  

Related Article: Investing in Gold Bars: How to Add Physical Gold Bars to Your Portfolio

Quality Mints

Here are a number of mints known and respected for quality and consistency:

• Engelhard
• U.S. Mint
• Royal Canadian Mint
• Perth Mint
• Royal Mint
• Johnson Matthey
• Asahi
• Republic Metals
• SilverTowne
• Valcambi
• Sunshine Mint
• Scottsdale
• Geiger Edelmetalle

Investing vs. Collecting Silver

For most people, the difference between being a silver investor rather than a hobbyist is in the pursuit of value. Investors seek to gain an advantage by consistently paying below the spot price of silver. Hobbyists and collectors are willing to pay more to get the most beautiful silver bars, coins, and rounds.

For investors, the primary consideration is the silver content. The beauty or condition of the bar is a secondary consideration. There is no advantage to overpaying for silver, from an investment point of view.

However, newly-minted bars of silver nearly always sell at a premium to the spot price. Silver investors should be on the lookout for ways to reduce the premium they pay for the metal.

When you buy silver in your IRA, you can only purchase bullion – silver, gold and other precious metals minted solely as a standard store of a specific weight of metal, or American Silver Eagle coins. IRA rules prohibit you from buying collectors’ coins or other silver pieces other than bullion bars and coins of sufficient and standardized purity, or the American Silver Eagle coin itself.

Silver Bar Sizes

Silver bars come in a wide variety of sizes. Most investors go for one-ounce ‘wallet-size’ bars up to 100-ounce silver bars. These are conveniently sized and relatively easy to buy and sell. You can buy silver bars as large as 1,000 ounces, though these are more difficult to sell. There is a much smaller pool of buyers interested in buying 1,000-ounce bars.

Volatility

Silver is both a volatile and a safe investment. It is volatile in the sense that the price of silver is subject to wide swings. It is a safe investment in that unlike paper assets, which can become worthless for all kinds of reasons, the value of silver is unlikely to fall to zero.

Tax Considerations and Silver

Silver held within IRA and other retirement accounts is subject to the tax rules for that type of account. For example, any gains on the sale of silver within a traditional IRA account are deferred until you take distributions, at which time they are taxed at ordinary income rates.

Silver held within a Roth IRA account can be sold tax-free, provided you've held the Roth IRA at least five years. Otherwise, you may pay a 10% penalty on any gains.

Note: Only high-quality bullion bars and coins are eligible for IRAs.

If you hold silver outside a retirement account, any gains on silver or other precious metals are normally subject to the 28% maximum capital gains tax on collectibles – or at your marginal tax rate if you are below the 28% tax bracket.

The tax is only payable when you sell. However, there’s an exception for silver or other precious metals that qualify as legal tender in the United States: These can be bought and sold freely without capital gains tax.

Silver that qualifies as legal tender tends to sell at a premium price compared to its weight, though.

Note: Dealers are subject to different rules than ordinary investors. See IRS Publication 544 for more details on the disposition of silver and other precious metals.