A few reasons to be bullish on silver
We have had a great pull-back presenting precious metal investors with opportunity buys for the long term. My primary thesis, much of which is laid out here, is that the endless easy money policies from central banks around the globe have created a long-term tailwind for the various precious metals. In recent articles, I have suggested that gold prices have long-term tailwinds in the form of extensive inflationary pressures and have recommended considering several gold plays, most notably the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU). I believe all precious metals will benefit from inflationary actions by central banks worldwide in the coming years. While gold is a straightforward way to benefit from the currency debasement occurring globally, I have opined that platinum could outperform gold but I further believe that silver is poised to outperform both of these metals for various reasons.
First, there will always be demand for silver because aside from silver being a precious metal, it also has many industrial and technological applications. Therefore, there will always be some level of demand, but such demand should pick up significantly when the global economy comes fully out of recession. Silver, besides being used as a currency in coin and bullion form, is also widely used in jewelry, silverware and dentistry. On the technology front, silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools (silver has antibacterial properties) and most recently, in nanotechnology.
The biggest growth area for silver use, beside being a precious metal currency is in technology, and that is where a lot of demand will be generated as we further delve into an era dominated by Apple (AAPL) iPhones, iPads etc. and its competitors' similar products. Silver is utilized heavily in these high-tech devices. On average, 6 cents of silver is used in each cell phone, according to industry reports. While that is not much for a single phone, considering there were nearly six billion mobile subscribers worldwide in 2011-2012, a number that's growing here into 2013, it becomes clear that new phones will always be in demand. Using the average of 6 cents a phone, we generate demand for $360 million of silver in just new mobile devices alone. There is a lot of silver in old cell phones, photography chemicals or medical devices that already has been taken out of the market. Although there is a push to recycle electronics and reclaim costly elements like silver within them, in situations where silver is used in very small portions (such as new smartphones), it is not cost-effective or even practical to recover the silver. Thus, new silver will be utilized in these devices.
At the time of this writing, silver is priced around $31.43 an ounce, approximately 35% off its all-time highs set in April of 2011. Gold is currently priced at about $1,680 an ounce. That represents a 53.5 gold-to-silver price ratio, whereas the historical ratio is 16-to-1 (figure 1). The respective prices of gold and silver have not approached this historical ratio in years, and I believe a reversion is long overdue. In order to see this reversion, gold would have to fall over $1,000 an ounce or silver will have to rise at a greater rate than gold in value in the coming years. I believe the latter is far more likely than the former, especially in a climate of endless monetary easing. Combine this with the rising demand in the technology sector and the fact that industrial demand will return in full force once we have moved completely out of the recession and we have a strong case for an investment in silver.
Figure 1. Historical Prices of Gold and Silver in the Last 100 Years.
I always recommend investing on dips and after the drop in silver prices we have had in the last two months, silver seems to be presenting another lucrative entry point (see figure 2). There are three ways investors can get exposure to silver. My top approach for silver exposure is purchasing physical silver bullion and coins, followed by purchasing shares of ETFs that track silver prices, and finally through the stock of the individual silver companies/miners.
Figure 2. Silver Prices in the Last 60 Days, New York and London Closes.
Physical assets are the best way to own silver
In my opinion, the best way to invest in silver is through physical bullion or coins. There are dealers in most cities and merchants on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver as a wise investment given government stimulus, but I also consider it to be a form of insurance in case of a total breakdown of the fiat currencies and modern financial systems we have in the world today. If you decide to invest in physical silver assets, do so by only buying from a reputable dealer. This is especially important if you're purchasing over the Internet, where you will want to look for a well established dealer with a long history and stability in the business. The only downside from Internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid such excessive shipping and handling fees.
Silver ETFs that every silver bull should know
Although I recommend owning physical assets, one option every silver bull should consider, especially those who do not feel comfortable with purchasing physical silver, is through buying units of an ETF.
The iShares Silver Trust (SLV) is a popular investment that seeks "to reflect the price of silver owned by the Trust, less the Trust's expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver.
Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market. The fund has $8.9 billion in assets with an annual expense ratio of approximately 0.5%. One important thing to note with the SLV is that iShares recently announced an increase in fees. This increase makes SLV slightly less attractive than it once was. Although SLV tracks the price of silver, if silver were to remain stagnant for all of 2013, say at $31 an ounce, then SLV would lose value given the fees and expenses. Overall, it does a good job of tracking silver price moves in general, but this caveat is important to consider for a long-term investment. Shares in SLV currently trade at $29.78 on average volume of 12 million shares and have a 52-week range of $25.34-$36.44.
ETFS Silver Trust (SIVR): This is another less popular ETF that tracks the price of silver. SIVR is "an investment Trust. The Trust holds silver bullion and issues shares in exchange for deposits of silver and distributes silver in connection with the redemption of baskets. The investment objective of the Trust is for the shares to reflect the performance of the price of silver, less the Trust's expenses and liabilities. The Trust is designed to provide an individual owner in the shares an opportunity to participate in the silver market through an investment in securities." SIVR has about $600 million in assets, far less than the $8.8 billion in assets of SLV. In contrast, SIVR has an expense ratio of 0.3% which is 20 basis points lower than the expense ratio of SLV. Over recent months, the performance of SLV has been superior to SIVR. SIVR currently trades at $30.16 on average volume of 225,000 shares with a 52-week range of $25.92-$37.20.
Sprott Physical Silver Trust (PSLV): The PSLV is an ETF that is backed entirely by physical silver bullion. The fund's goal is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical bullion. The Trusts offer a number of compelling advantages over traditional exchange-traded bullion funds, including bullion storage in Canada which is not held with a bank-owned custodian. Further, the fund allows investors to redeem units of the ETF for delivery of an equivalent amount of physical bullion. In this regard, the fund is unique relative to the SLV and SIVR. Currently PSLV trades at $12.13 a share on average daily volume of 1.4 million. The 52-week range of PSLV is $10.87 to $16.13.
Other ETFS to consider that invest in silver
PowerShares DB Silver (DBS): This is a thinly-traded investment fund that tracks the price and yield performance, before fees and expenses of the DBIQ Optimum Yield Silver Index Excess Return which tracks the underlying performance of silver. The index is comprised of silver future contracts and the fund was launched in January of 2007 and since then has been able to amass an asset base of $66.82 million.
On average, around 16,000 shares of the ETF trade each day. DBS has a high level of charges, assessing 79 basis points in fees and expenses. Not surprisingly, the ETF is extremely volatile having an annualized standard deviation (a measure of variance around the mean) of nearly 40% given its focus on futures contracts which are more volatile than simple spot prices. The ETF has returned around 2.8% in the trailing one-year period, but it has faced some weakness in the preceding few months as silver prices have been under pressure since the fall of 2012. It currently trades at $52.31 and has a 52-week range of $45.06 to $65.44.
ProShares Ultra Silver (AGQ): This ETF applies a 2X exposure leverage to silver using forward contracts and futures. The investment seeks "to provide daily investment results (before fees and expenses) that correspond to twice the daily performance of silver bullion as measured by the United States dollar fixing price for delivery in London. The fund invests in any one of or combinations of financial instruments (swap agreements, futures contracts, forward contracts and option contracts)." This is a play for short-term appreciation in silver prices. Like other daily funds of its nature, it should not be held for periods longer than a month in general. AGQ currently trades at $44.24 on average volume of 1.5 million. AGQ has a 52-week trading range of $34.50-$74.65.
You can also consider a basket of silver companies
Finally there are the silver companies/miners to consider for exposure to silver. The best way to gain exposure to silver miners as a whole is through the Global X Silver Miners ETF (SIL). SIL currently trades at $22.41 on average daily volume of 266,000 shares. SIL has 52-week range of $16.54 to $26.62. For those willing to take on more risk and do the necessary homework, an individual silver company or miner could be considered in place of SIL, which potentially could offer better returns.
Precious metals stand to gain significantly from balance sheet expansion at central banks. Gold is an excellent play off of the stimulus coming from governments worldwide, but I believe silver and silver companies may outperform gold in the next year. Silver is not only a precious metal currency, but also has massive technological demand. While the list of ETFs in this article is not exhaustive, they represent my preferred ways to gain exposure to silver, particularly the PSLV which is my favorite on the list. At current levels, I believe silver and silver companies are opportunity buys, especially for the long-term investor.
Disclosure: I am long AAPL.