The last two years have given silver investors an excellent chance to accumulate a long-term position as we've pulled back steadily since April 2011. 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. So what is the path to a surge in silver prices? 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, the Federal Reserve's continued accommodative and dovish policies should create a weaker dollar in the long run, inflation and in turn, bolster the prices of gold and silver. Yesterday (May 1), the FOMC statement released indicated the pedal is still to the metal. The Fed left the federal funds target rate between 0% and 0.25% and also maintained the $85 billion-per-month purchases of Treasury and mortgage-backed securities policy in place. I maintain that for the long-term, these policies will be detrimental to the value of the dollar and over time gold and silver will continue to rise. The second key driver that I believe could cause a surge in silver in the next few years off the recent lows is the multiple sources of demand for the metal, in particular technology.
Multiple Sources of Demand for Silver
This year we have 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 silver above the $22.00 mark. This mark serves as an important technical resistance point. It has bounced off this level twice since the major selloff two weeks ago. 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. The most recent Q1 GDP number showed expansion of 2.5% but was far below consensus estimates of 3%. Further, the jobs picture has yet to improve markedly, though unemployment has come down, albeit slowly. This slow growth has led to industrial demand for silver, but the growth is slow enough to keep the Fed on the easing accelerator which bolsters the precious metal side of the metal.
When the economy 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 and most recently, in nanotechnology. One lesser known growth area for silver use 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 with its millions of iPhones sold has created massive industrial demand for silver. As its sales are strong this demand will continue. In fact, there is an average 20 cents of silver now used in each cell 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.
Gold-to-Silver Price Ratio
At the time of this writing, silver is priced around $23.30 an ounce, approximately 60% off its all-time highs set in April of 2011. Gold is currently priced at about $1,450 an ounce. That represents a 61 to 1 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.
To achieve 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, but it has generally been in the 50-54 range for some time.
Three Main Ways To Invest 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.
I firmly believe 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 Track Physical Prices
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 $24 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 $22.86 on average volume of 11.4 million shares and have a 52-week range of $21.96-$34.08.
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 $9.33 a share on average daily volume of 1,200,000. The 52-week range of PSLV is $8.93 to $14.47.
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 $25.33 on average volume of 1.6 million. AGQ has a 52-week trading range of $23.53-$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.
My favorite individual company is Silver Wheaton (SLW). SLW is a worldwide silver streaming company. Streaming is a very unique and long-term solvent business approach in the gold and silver space. The company offers a superior alternative to traditional precious metal mining stocks because in general the approach SLW takes offers a stronger opportunity for revenue growth with lower long-term overhead than mining companies, many of which are in unstable jurisdictions. Rather than mine for metals directly, SLW generates its profits by providing upfront financing for other companies in the mining space looking to expand and drill for precious metals. In exchange for the up-front financing of these companies, SLW acquires the right to purchase a portion of production generated from the mines at a fixed cost. SLW has contracts with companies around the world to purchase silver production in bulk at prices well below market value. Once SLW acquires the silver at the predetermined upfront investment cost, it then proceeds to sell the silver at higher prices.
At the time of this writing, SLW currently trades at $24.21 and has a 52-week trading range of $21.79 to $41.30. The stock is down over 30% since the start of the year and represents a good opportunity to initiate or add to a position. On average, about 5.1 million shares exchange hands daily, and most trading session volume has been around this number. The company trades at a 14.7 P/E multiple but only a 0.68 PEG ratio and currently yields 2.4%. SLW's earnings per share are estimated to grow at a rate of 36% in the next five years, though recent lower silver prices have been a short-term impediment to revenues. The company also has a strong balance sheet with a debt-to-equity ratio that is decreasing. SLW also has more proven and probable reserves of silver in its portfolio than other major silver companies as discussed in this recent piece.
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. With the Federal Reserve once again reiterating that they will maintain their accommodative stance the long-term tailwinds are in place for the precious metals, despite recent price action and technical selling. However, silver is not only a precious metal currency, but also has massive industrial and technological demand, particularly in the technology sector. Smart phones alone generate billions of dollars in silver demand, much of coming from tech giant AAPL. This article presents some bullish evidence to argue in favor of silver and I believe each approach outlined can be profitable on the rebound. 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 gold and silver bullion.