Buying and selling spreads seem high for physical compared to paper silver. Why?

There is a saying in the precious metals industry: “If you cannot touch it you do not really own it”. Paper silver is a derivative of physical silver bullion. In most cases these derivatives are secured through other derivatives which in turn are backed by only a tiny fraction in physical bullion reserves. Normally, there is no practical way to convert the paper silver to physical bullion. This means that you do not own the bullion, you only purchase price exposure. The lack of physical backing means that it is possible to create nearly unlimited amounts of paper silver at virtually no cost. Furthermore, only a small fraction of deposited money is needed by the issuing institution to hedge their position through other financial instruments such as Comex futures contracts.

Hence, these paper silver products can be very profitable for the issuer even with low buy / sell spreads as there is almost no cost involved in creating paper silver positions. As a consequence at the Comex futures exchange – which is often used to back silver derivatives and the guarantor of last resort – the ratio of physical silver reserves to paper positions is well below 10%. So there are at least 10 claims on the same silver and this ratio is likely to shrink further as more silver derivatives are opened. Physical silver bullion means that you take possession of the actual metal and you own 100% of the bullion (measured in troy ounces).

Many of our customers purchase physical bullion as a long term means to profit from the ongoing decline of confidence in the US dollar, given the vast amounts of debt that was accumulated over the last 30 years and the more recent explosion of currency (base money, or euphemistically called "quantitative easing") across the world. Given this context the demand for physical bullion comes from the simple fact that physical bullion, unlike bullion derivatives, cannot be created out of thin air. By owning the actual metal you can make sure that there are no multiple parties with claims on the same bullion and your position cannot be frozen or closed as it could with a financial derivative.

Thus, to actively trade on silver, a paper silver derivative that obtains price exposure will likely be a better choice as transaction costs are lower and there is no GST (tax) involved. On the other hand, for a solid long term protection against currency crises, high inflation and a potential systemic financial collapse, the simplicity and 100% ownership of physical bullion are compelling arguments.