Why Be Bullish On Silver?
On short-term reason to be bullish on silver is the Federal Reserve. As most reading this article are aware, the much awaited and "market priced-in" taper of Fed purchases was supposed to be announced last week on 9/18/13 to the tune of $10-$20 billion a month. But to the Street's surprise, there was no taper announced. I have maintained that one reason to own gold and silver is to hold a store of value as currencies are watered down globally.
Often, people have argued with me saying there will be deflation as a result of the Fed and that gold and silver only do well with inflation. Maybe there is some truth to this. The question I ask is this. If you hold a fixed percentage of currency and suddenly there is more of that currency in circulation, wouldn't you now possess a smaller percentage of said currency? By definition the value of your currency is now reduced; its been diluted, or devalued. This is the primary reason of holding some precious metals in your portfolio, in my opinion. In the short-term, the Fed views the market as too weak to cut purchasing. Recently Stan Druckenmiller stated on CNBC attested that "you've gotta love gold here." Well, I also love silver. This is because I suspect a short-term bounce in the metals into the year's end until a taper is finally announced. Longer-term there is a lot to love about silver.
The last two years have given long-term silver investors an excellent chance to buy on the way down 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. Despite the short-term pressure on the metals in 2012-2013, in many recent articles I have suggested that gold and silver prices have long-term tailwinds in the form of extensive inflationary pressures. I cannot say with certainty that we will not see some deflation first. However, I think that once inflation picks up, it could be severe. While gold is a straightforward way to benefit from the long-term currency debasement occurring globally, I believe that silver is poised to outperform in the next decade or so because it has unique supply and demand issues that gold does not benefit from. Bottom line, it could become more important than gold over the next century.
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, 16 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. 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.
Precious Metal Demand
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 $18.00.
As I alluded to above, silver is commonly utilized in industrial processes. These processes have been designed not to consume gold. At the high prices gold has commanded for decades, it is nearly all recycled. The same cannot be said for silver as I pointed out above it is often just not cost effective to recover silver. It is said that 99% of all gold ever mined is still in existence above ground. For these reasons, silver stockpiles as a percentage of all silver ever mined is so much smaller than gold stockpiles as a percentage of all gold ever mined.
During the 1950's silver was consumed in a variety of vital modern applications at a phenomenal rate. In 1998, known stocks of silver had shrunk over 95%, to around 500 million ounces. The nine and a half billion ounce draw down in total silver inventory, was the result of the persistent shortfall between supply and demand, which continues to this day, and has likely accelerated. During the late 90's the 200 million-ounce annual deficit mirrored the long-term trend line average. This continuing deficit is remarkable in that there has been decent growth in world production of silver over the past 50 years, but obviously not enough to satisfy the surge in industrial demand. Because demand for silver is unprecedented, not just for precious metal investment, but in industry, particularly in technology, I see this trend continuing. Eventually we will likely not have enough silver to meet demands. The end result will likely be intense recycling initiatives and a rising long-term price, in my opinion.
At the time of this writing, silver is priced around $21.80 an ounce, approximately well off its all-time highs set in April of 2011. Gold is currently priced at about $1,325 an ounce. That represents a 60.8 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, unprecedented 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 as it has generally been in the 50-54 range for some time. I suspect we will at minimum return to this modern historical ratio, which, assuming gold holds around $1,325 an ounce, means silver will rise to between $24.53 an $26.50 ounce, or between 12.6% and 21.6%
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 $8.0 billion in assets with an annual expense ratio of approximately 0.5%. Although SLV tracks the price of silver, if silver were to remain stagnant for all of 2013, say at $22 an ounce, then SLV would lose value given the associated 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 $21.00 on average volume of 11.3 million shares and have a 52-week range of $17.75-$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 $8.74 a share on average daily volume of 975,000. The 52-week range of PSLV is $7.16 to $14.35.
Alternative Silver ETFs, Including A Leveraged ETF
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 $39.97 million. On average, around 10,500 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 $36.66 and has a 52-week range of $30.85 to $60.82.
ProShares Ultra Silver (AGQ): This is a leveraged tool that can be very profitable or downright dangerous depending on the short-term action in the price of silver. 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 $20.25 on average volume of 2.1 million. AGQ has a 52-week trading range of $15.01-$60.54.
Take On Risk With Individual Silver Companies
Finally there are the silver companies/miners to consider for exposure to silver. There are plenty of individual companies that I really like. Most notably, I like the silver streaming company Silver Wheaton (SLW). See my other articles for which are my favorites and why. Streaming is a very unique and long-term solvent business approach in the gold and silver space. SLW 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 up front 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, the 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. I am becoming fond of so-called streaming companies, as there is less direct risk than the miners, yet the company is subject to the performance of the miners it contracts with, and by extension, the stock is tied to the price of silver. SLW currently trades at $24.74. SLW's 52 week trading range is $17.75-$41.30. The company trades at a 17.5 multiple, but only at a 1.12 five year PEG ratio, and currently yields 1.62%.
I maintain that long-term precious metals stand to gain significantly from balance sheet expansion at central banks and currency debasement. The no-taper announcement has given a green light to invest in silver and gold, as well as precious metal equities through the end of the year. For the long-term I believe silver and silver companies will outperform gold. Remember that silver is not only a precious metal currency, but also has massive industrial and technological demand. There is evidence that supply is diminishing in the face of unprecedented 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 am long physical silver and gold and other individual companies not mentioned here.