-- Posted 21 January, 2008 | | Discuss This Article - Comments:

I was asked recently to give some thoughts on buying silver in Britain as an investment and now put these considerations into the public domain with some additions. But first the obvious question, why would Brits buy silver? The answer is given in the chart below which is the five year progress of silver priced in pounds sterling.

From a low point of £2.70 per ounce back in June 2003, silver has progressed to a new multi year high of £8.32 only a week ago. That is a 3 fold increase in the price of silver in 4.5 years and the main reason why more and more British investors are saying “How do I buy silver in Britain?”

Note I said multi-year high. The silver price spike of 2006 witnessed in the USA was also repeated in Britain with similar huge gains in price. In both cases, we saw silver prices more than double in a matter of months. The US dollar price finally exceeded those highs of 2006 back in November 2007 but it is only now that the UK is confirming the international bull market in silver and we await the stronger currencies such as the Euro to fall into line soon. That previous closing high was £7.91 on the 18^th April 2006. British silver set a new high on £8.32 on the 14^th January 2008.

So with this in mind, how does one go about buying silver in the United Kingdom? The first thing to say is that it is pointless to buy silver from cheaper places such as America. The custom and duty due on the item as it enters Britain will be something approaching 15% plus you would have spent more on postage than you would have in Britain. Moreover, the parcel carrier will add insult to injury by charging you about £8 ($16) to collect the tax and send it the government. Indeed the collection charge may exceed the amount of tax they are collecting! 

Also, buying silver in a VAT-free country is okay so long as you do not bring it into Britain or again Customs and Excise will demand their portion! One may keep the silver offshore but when you sell your silver abroad you become liable for tax as a British taxpayer no matter where that silver to cash transaction was done.

So, let us look at silver bullion bars bought directly in Britain and kept in Britain. There are very few coin dealers in Britain who deal in such items. The main source for buying small amounts of silver bars is eBay where we find private individuals as well as some coin dealers selling such items. However, these items command big premiums in Britain. It is not particularly difficult to obtain small lots of 1kg bars in Britain though the larger 100oz bars tend to be rarer. In my experience looking at eBay we get varying mark ups of up to 40% on 1kg and 100oz bars. This is partly sales tax (VAT), fabrication costs and demand. Note that unlike gold purchases, silver bullion is not VAT exempt. This premium may vary according to the silver price but that is merely my opinion.

As a side note, VAT is only payable on silver if the seller is VAT registered. The government encourages small businesses by allowing them to sell VAT discounted goods. However, this seems to have no effect on silver prices as buyers do not distinguish between registered and non-registered sellers.

Using our worst case example of 40%, if silver was at £8 ($16) then it has to rise to over £11 ($22 at current exchange rates) just for you to break even. There is however an argument that this markup is preserved across the buy and sell. A 40% markup at £8 silver is about £3. If silver goes to £13, to reclaim your £3, the mark up only has to be 23% at £13 silver. If the 40% markup is preserved, your £3 becomes £5. However, it is debatable how this premium will pan out as silver prices go higher.

As silver prices climb higher I believe that premiums will narrow as the price of the given silver lot increases. In other words, the premium on a 1000oz bid will be less than a 100oz bid. That may be true even now due to discounts on larger lots but I expect it to widen as the bull market continues into the years ahead.

A look at recently completed sales on eBay reveals an interesting fact. The table below shows six 100 ounce and 1kg bars, the spot price of silver at time of completion, the price each bar sold for and the markup on the spot price in percentage terms. Note that a 1kg bar contains 32 troy ounces of silver.

Now I didn't quite expect the markups on 100oz bars (all Engelhards) to be so much less that the 1kg bars! The average 100oz markup is 14% while it is twice as much at 30% for the 1kg bars. If you can get an Engelhard 100 ounce bar for only 10% markup you are doing well! I am not entirely sure if this discrepancy is a statistical quirk common in small samples or some other reason. Certainly premiums between the two weights of bars have not been that dissimilar in previous studies.

One possible influence on markups is the price of the bar. Since 100oz bars cost more than twice that of 1kg bars they may attract less bidding power. In other words, investors of the type attracted to eBay are not prepared to commit so much money to one single item.

Note I have not included postage costs on this which can be typically vary from £10 to £25 and needs to be accounted for. For the purchases above this would amount to about 3% of the sell price. It goes without saying that one should maximise their silver purchases by not spreading them across small lots which incurs higher postal charges.

Other silver bullion contenders are coins. Sadly here you are looking at mark ups even higher than bars because there is the added numismatical premium which means you are in competition with collectors who may not be interested in the investment potential of silver. Now, again you may recoup the premium on reselling but since some of these coins command up to 100% premium, you are also getting less silver for your money compared to the bars and hence getting less leverage on any silver price jumps. Recent purchases by myself for numismatical purposes of individual silver eagles commanded 70% premiums once postage was added. Buying large lots helps reduce premiums and sometimes lots of 20 silver eagles can be found on eBay.

The Canadian maples tend to go for slightly lower premiums than the silver eagles but the British produced Britannias can exceed 100% because of their lower mintage numbers. So I would steer clear of eagles, maples and britannias unless you see silver going to $100+ and you intend to hold them for the long term.

One very British solution is to buy old florins, half crowns and shillings. These were the pre-decimal form of British coinage which were phased out over the 1970s. Those coins minted before 1920 are composed of 92.5% silver whilst those minted before 1947 are 50% silver. The pre-1947 type can be bought in bulk from coin sellers and eBay and can be often be obtained for less than spot price. The reason for the low premium is their relative unattractiveness (worn coins) and their bulk since they are 50% silver. They also do not attract VAT and have minimal numismatical value.

However, one prime consideration in buying any of these is liquidity or how fast can you sell the physical? Unlike the USA, you are not likely to be within reasonable driving of a local coin dealer to sell over the counter. The number of such dealers is quite small here.

Also, considering how quickly silver can drop in price after a big run up, you can get "caught short" and may even wipe out all your gains! So unless you are holding for the long term, you will have to be quite organized to sell off such items quickly on eBay or to a seller (who may deeply discount on fear of a price crash) before a price drop scares buyers away.

In that light, you may also want to consider buying the Barclays silver ETF or similar instruments such as goldmoney.com which offer silver bullion backed accounts. These track the price of silver and you can sell it all with a phone call to your broker.

The other options are mining stocks and silver derivatives but these are not the same as physical silver as you may guess. Also, commission charges are higher for stockbrokers here in Britain plus extra fees can be added on for buying well known but foreign stocks such as PAAS, SSRI, SLW and so on. Nevertheless, the expected leverage these instruments give over silver should negate such fees.

What are the tax implications in Britain on cashing in your silver profits? Capital gains tax is payable on the profit from your physical silver and mining shares. CGT is undergoing some changes and an announcement from the chancellor is due soon but it looks like a flat rate of 18% will be introduced from April with nothing payable on the first £9,200 which could be shared with a partner.

If you are still liable for CGT after cashing in your mining shares, it is possible to offset some into an tax free ISA (Individual Savings Account). As much as £7,000 can be invested tax free in a maxi ISA. Also note that one should be able to include shares in the Barclays silver ETF in an ISA. However, this only applies to shares. You cannot place silver bullion in an ISA.

So with judicious use of tax allowances, one could avoid paying tax on the first £32,400 (about $65,000) of silver profits if it is a mixture of bullion and shares.

Note also that since the end of the tax year on April 5^th is nearing, one could also maximize their silver profits by selling some of their silver before April 5th to use up as much of their tax free allowance for the 2007-2008 tax year and then repurchase to make use of the 2008-2009 allowance. This strategy depends on how much churning your silver position costs compared to the tax you avoid paying.

So there you have it, a brief look at the pros and cons of buying silver directly or indirectly in Britain. Good luck in your British silver investing!

Further comments can be had by going to my silver blog at http://silveranalyst.blogspot.com where readers can obtain a free issue of The Silver Analyst and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk