Paper silver: ETCs, futures, mini futures, CFDs, metal accounts and miners compared

What you will learn

• How physically backed silver ETCs work and why EU UCITS ETFs cannot hold only silver
• How silver mini futures and CFDs work and what they cost
• Why an unallocated account is a claim, not ownership
• How to compare all routes by cost, counterparty risk and tracking

Explanation

Ownership routes and counterparty risk were introduced in the Gold course ("Ways to Own or Trade Gold"), and ETC structures in the Commodities course. Here we focus on silver, where VAT on physical metal (lesson 4) makes paper routes especially relevant.

Physically backed silver ETCs

An ETC (exchange-traded commodity) is a debt security traded on exchanges such as Xetra. A physically backed silver ETC holds bars in a vault, usually with a trustee holding security over the metal. Check in the product documents:

• Is the metal allocated (specific, numbered bars) and is a bar list published?
• Is physical delivery possible, at what cost and minimum size?
• The annual fee, which reduces the silver per security daily.

Buying a security is exempt from VAT, so an ETC avoids the 19% VAT on bars: its main cost advantage for a German investor. Tax on gains depends on the structure (lesson 12).

Why there is no "silver UCITS ETF"

The EU UCITS Directive (UCITS = Undertakings for Collective Investment in Transferable Securities, the retail fund rules) says a UCITS fund may not acquire precious metals or certificates representing them, and it requires diversification. A UCITS ETF can hold mining shares or a broad commodity index, but not only silver, so single-metal exposure in Europe usually comes as an ETC.

Futures and micro futures

Exchange futures (lesson 6) offer central clearing and tight spreads, but have large contract sizes, need margin and must be rolled.

Mini futures

In Germany, banks issue mini futures, knock-out certificates that are not exchange futures. The bank finances part of the position up to a financing level, which rises daily by the bank's financing rate; you pay only the difference between spot and that level. If silver touches the stop-loss level (slightly above the financing level for a long product), the certificate is closed and you receive a small residual value, possibly near zero in a gap. Mini futures are leveraged and carry issuer risk.

CFDs

A CFD (contract for difference) on silver is a contract with a broker; you never own silver. Under ESMA (European Securities and Markets Authority) rules for retail clients, the maximum leverage for commodities other than gold is 10:1, so the minimum margin is 10% of the position value. Overnight financing is charged on the full value, and losses can build very quickly.

Unallocated metal accounts

An unallocated account is a general claim to an amount of silver, not specific bars. The provider may lend the metal, and if it fails you may be an ordinary creditor.

Mining shares and streaming companies

Miners and streaming companies (which pay a miner upfront for the right to buy future silver at a fixed low price) give leveraged, company-specific exposure; see lesson 10.

Worked example

Hypothetical example: €10,000 of silver exposure for one year; the price ends unchanged. All rates are invented; income tax is excluded.

1. Physical bars (net premium 4%, 19% VAT, bid 96%, storage €30): metal bought €10,000 ÷ 1.19 ÷ 1.04 ≈ €8,080.16; sale ≈ €7,756.95; loss ≈ €2,243.05 + €30 = €2,273.05.
2. ETC (fee 0.40% a year, round-trip exchange spread 0.10%, two orders at €5): €40 + €10 + €10 = €60.
3. CFD (financing 6% a year on full value, spread €8): €600 + €8 = €608. Margin tied up: 10% = €1,000.
4. Mini future (financing level €7,000, your capital €3,000, leverage about 3.3; financing 6% a year; spread €20): €7,000 × 6% + €20 = €440. The financing level rises to about €7,420 over the year, with the stop-loss slightly above. A temporary fall of roughly a quarter would knock the product out and lose most of your €3,000, even if silver later recovered.

In this flat year the ETC is cheapest and the bar by far the most expensive because of VAT. Leveraged products suit shorter holding periods and carry knock-out or margin-call risk.

Common mistake

Practice activity

Hypothetical: €5,000 of silver exposure for two years, price unchanged. (a) ETC: fee 0.50% a year, two orders at €5, round-trip spread 0.10%. (b) CFD: financing 7% a year on the full value, spread ignored. Calculate the total cost of each and say which route suits a two-year holding.

Key takeaways

• Physically backed ETCs avoid VAT and are usually the cheapest long-term route; check allocation and delivery terms.
• UCITS rules prevent a pure silver ETF; single-metal exposure in Europe comes as an ETC.
• Mini futures and CFDs are leveraged and charge financing; a knock-out or margin call turns a temporary drop into a permanent loss.
• Unallocated accounts are claims on a provider, not ownership.

Next step

Next, you will study silver futures: contract sizes, margin, the curve, rolling and the LBMA silver price.