A few reasons to be bullish on silver
The last two years have given silver investors an excellent chance to buy on the way down as we've pulled back steadily since April 2011. This selloff has presented precious metal investors with opportunity buys for the long term. As the price has come down I have been recommending for some time to dollar cost average and/or pyramid down into silver and silver equities. My primary thesis, much of which is laid out in the background section 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. Despite the short-term pressure on the metals, in many recent articles I have suggested that gold and silver prices have long-term tailwinds in the form of extensive inflationary pressures. Besides my favorite investment approach, physical coins and bullion, I have further recommended considering several gold plays, most notably the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU). I believe that although these are paper investments, they can still be profitable as 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 believe that silver is poised to outperform in the next decade. Bottom line - I believe it will rebound.
It should be obvious, but 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. Despite the stock markets in the U.S. setting all time highs, the broader economy is still just limping along. When it rebounds, there will be a spike in demand in many areas. The demand will not be just in coin and bullion form, but also 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 even has antibacterial properties) and most recently, in nanotechnology. The biggest growth area for silver use, besides 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. Apple has created massive industrial demand for silver.
Silver is utilized heavily in these high-tech devices. On average, 20 cents of silver is now used in each cell phone as when silver was about $9 an ounce, 6 cents of silver was utilized per phone. 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 in 2013, it becomes clear that new phones will always be in demand. Using the average of 20 cents a phone, we generate demand for over $1 billion worth 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 have 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.
But the demand has not stopped there. 2013 has seen a shortage of both American Silver Eagles from the US Mint, as well as "junk" silver available (that is, pre-1965 US dimes, quarters and half dollars). Further, silver ETFs, including some that will be mentioned in this article, have continued buying silver coins and bullion at a record pace. Thus, demand for the metal is there, and has helped keep a floor under silver prices of around $27.50.
At the time of this writing, silver is priced around $28.30 an ounce, approximately 43% off its all-time highs set in April of 2011. Gold is currently priced at about $1,597 an ounce. That represents a 56.4 gold-to-silver price ratio, whereas the historical ratio is 16 to 1. The respective prices of gold and silver have not approached this historical ratio in many 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. The ratio has crept up year to date, it has generally been in the 50-54 range for some time.
Investing in Silver
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 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. 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 Can Be Profitable
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): This 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 $29 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 $27.42 on average volume of 10.3 million shares and have a 52-week range of $25.34-$34.08.
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 $28.06 on average volume of 203,000 shares with a 52-week range of $25.92-$34.85.
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 Trust offers 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 SLV and SIVR. Currently PSLV trades at $11.22 a share on average daily volume of 970,000. The 52-week range of PSLV is $10.87 to $14.47.
Alternative Silver ETFs
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 faced some weakness in the preceding few months as silver prices have been under pressure since the fall of 2012. It currently trades at $48.53 and has a 52-week range of $45.06 to $60.82.
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 U.S. 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 $37.75 on average volume of 1.3 million. AGQ has a 52-week trading range of $34.50-$60.63.
Finally there are the silver companies/miners to consider for exposure to silver. There are plenty of individual companies that I really like. See my other articles for which are my favorites and why. 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 $18.15 on average daily volume of 153,000 shares. SIL has a 52-week range of $16.54 to $25.789. For those willing to take on more risk and do the necessary homework, an individual silver company or miner on my recommended list could be considered in place of SIL, which potentially could offer better returns. However, SIL will offer exposure to the whole sector.
I maintain that long-term precious metals stand to gain significantly from balance sheet expansion at central banks and currency debasement. 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 few years. Remember that silver is not only a precious metal currency, but also has massive industrial and technological demand. This article presents some bullish evidence to argue in favor of silver and I offer several ETFs for varying risk appetite. Physical is my preferred way to go but the ETFs mentioned in this article are not exhaustive. Further, money can be made with them. At current levels, I believe silver and silver companies are significant opportunity buys, especially for the long-term investor.
Additional disclosure: I own physical coins and bullion. I have been adding to holdings every 75 cent drop in silver. I am also long individual silver companies not mentioned in the article.