[Originally published on 8/18/2014]
Too often silver falls in the shadow of its flashy, favored cousin gold, but the precious metal grabbed headlines last week when a 117-year-old tradition came to an end.
Until last week, the price of silver had been decided, or “fixed,” each day at noon in London by representatives from three different banks. The process was conducted in private and it was all very secretive.
Now, regulators have finally dragged the silver “fix” into the 21st century in an effort to improve transparency and reduce the risk of price manipulation. The new system, called the London Silver Price, is run by CME Group and Thomson Reuters. It uses trading on the over-the-counter market and determines the price through an algorithm.
By taking the pricing of silver out of the hands of men chatting around a table and moving it to a more mathematical approach, we can afford a little more confidence in the market, while reducing the need for yet more oversight and regulation.
For the past several years, silver has been one of the most undervalued commodities in the market. But as the white metal takes a firm step forward into a more modern method of trading, it will attract more attention among investors.
Since its peak in 2011, the price of the precious metal has fallen 56% to about $19.50 today. In comparison, gold has fallen just about 30%. Part of this is due to the fact that silver has supply-and-demand factors in multiple industries that influence price, while gold demand is pretty much limited to those who want to store it safely in a vault.
Industrial uses for silver range from cell phones to solar panels and from engines to mirrors. Modern medicine has also made heavy use of silver in antibacterial creams, X-rays and other materials.
While silver holds a high degree of industrial demand, it is still just as influenced by fear as gold — but those other market factors for silver make the metal much more volatile.
Take a look at this chart from August 2010 to April 2011 with gold and silver prices overlaying each other.
As you can see, gold and silver have a strong positive correlation, but looks can be deceiving. While they both trend in the same direction during times of safety, one is trading in the thousands while the other still sits around the double digits. So gold during this time frame climbed about 25% — which is not bad by any means. But silver, which is often considered the poor man’s gold, surged a whopping 120%.
That’s where I want to put my investment dollars to work ahead of a significant rebound, and miners are one of the best ways to play it to attain the greatest leverage for my money.
Cheap Way to Bet on a Rise in Silver
The most undervalued silver miner that I like today is Coeur Mining (NYSE: CDE).
The company owns mining assets all over the world — U.S., Mexico, Bolivia, Argentina, Australia, Ecuador and Chile. Due to the drop in silver prices lately, shares in Coeur have come under pressure, slipping 50% in the last year — but this presents us an excellent opportunity to get in while the price is low.
This stock is toting a book value 50% below its peers, trading at just 0.52 times its anticipated book value — making it one of the cheapest silver stocks you can invest in today.
The company also knows the market is cheap because of the drop in silver prices. That’s why the company has invested over $400 million — half of its current market cap — over the past two years to take advantage of the slump in silver prices.
Coeur currently fetches about $8 a share. But it would be practical to see shares trade at least at one time its book value — a 100% gain from today.
And it certainly won’t hurt when silver starts to rally once again.
The Silver Comeback
I don’t expect silver prices to remain subdued in the coming years. I believe it will exceed $50 due to rising demand for its industrial uses. As the great industrial machines around the globe continue to come back on-line and economies crawl from the recent financial crisis, silver demand will increase as more of the malleable metal is needed in all of our gadgets as well as the healthcare industry.
Furthermore, silver could see an additional pop in demand as investors hedge against the fiscal disorder our country is in. Like gold, silver is a valuable precious metal that will gain in value as fiat currencies crumble and fall. Your smartest move is to get in while the price of the metal is low.
Looking back to 2011, when silver came near $50, Coeur traded at a whopping 350% above its current price.
Disclosure: The author has no positions in any of the stocks mentioned in this article.