Precious metals are opportunity buys for the long term. My primary thesis to support price appreciation in the precious metals is that the endless easy money policies from central banks around the globe have created a long-term tailwind as fiat currencies will be devalued over time and investors will seek currencies that hold their value such as gold and silver. 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. 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.
At the time of this writing, silver is priced around $31.44 an ounce, approximately 35% off its all-time highs set in April of 2011. Gold is currently priced at about $1,665 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. For this reversion to materialize, 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 more likely, 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
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.
Physical Coins and Bullion; My Preferred Method to Owning Silver
The best way to invest in silver, I believe is through physical bullion or coins. There are dealers in most cities and businesses on the Internet where you can buy silver assets. I not only consider physical silver as a wise investment given endless government stimulus and record debt, 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. My favorite company is Gainesville Coins. The only downside from Internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Gainesville does not have a minimum purchase and tends to have lower premiums on merchandise relative to major competitors. However, to avoid shipping and insurance fees buy locally.
Silver ETFs; Track Silver Well But Not All Are Created Equal
Although I recommend owning physical assets, one option for those who do not feel comfortable with purchasing physical silver, is through buying units of an ETF.
My preferred way to buy stock exchange traded silver assets is through the Sprott Physical Silver Trust (PSLV). This is primarily because the PSLV is an ETF that is backed entirely by physical silver bullion. Every unit owned by an investor represents a portion of physical silver. 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 other silver ETFs. 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.
Another basic ETF option to consider is the iShares Silver Trust (SLV), although I prefer PSLV. SLV is a popular investment that attempts 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, it provides investors with an alternative that allows a level of participation in the silver market through the securities market.
SLV has $8.7 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 these 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 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 $30.43 on average volume of 12 million shares and have a 52-week range of $25.34-$36.44.
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 $46.94 on average volume of 1.5 million. AGQ has a 52-week trading range of $34.50-$74.65.
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 $54.37 and has a 52-week range of $45.22 to $65.44.
Silver Company Stocks
Finally there are the silver companies/miners to consider for exposure to silver. I have previously recommended a number of individual companies and regard them as strong buys at present levels. My preferred silver company is Silver Wheaton (SLW), followed by Pan American Silver (PAAS). For those investors with a higher risk tolerance, I strongly recommend a bet in Great Panther Silver (GPL). For those who do not want to pick a single company, 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 $21.11 on average daily volume of 263,000 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 industrial and technological demand. While the list of ETFs in this article is not exhaustive, they represent my preferred ways to gain exposure to silver second only to physical silver. At current levels, I believe silver and silver companies are opportunity buys, especially for the long-term investor.
Additional disclosure: I also own physical silver and gold bullion