Gold ETFs Get All the Attention, But What About Silver?

Gold and its ETFs are real attention hogs. Sure, the metal is pretty to look at. It's shiny. But it's also being outperformed by other decidedly less sexy metals.

streetTRACKS Gold Trust (GLD) and iShares COMEX Gold (IAU) are not too shabby: they're up year-to-date by 6.3% and 5.7%, respectively.

That's all well and good, but consider:

• Market Vectors Steel (SLX) is up 14% year-to-date
• iShares Silver Trust (SLV) is up 12.7% year-to-date
• PowerShares DB Base Metals (DBB) is up 17.2% year-to-date

So, why does gold get the lion's share of the headlines, even as it's retreated from record prices? It dipped below $900 on Thursday, falling almost 15% off those records, reports Atul Prakash for Reuters. The metal rose slightly today but it's expected that more downward pressure lies ahead, as some concerns about the credit crisis have eased.

Growth in emerging markets is fueling much of the demand for steel and other metals with industrial applications, such as silver and copper (futures for which are held in DBB, along with aluminum and zinc).

Yesterday, we noted that China has doubled its number of steel factories in the last few years. Silver is scarce, as well, with dealers paying a premium over the spot price. A strike at a Chilean copper mine run by the world's largest copper producer also raised concern that prices will increase as supplies fall, reports Claudia Carpenter for Bloomberg.

Can the Rally in Silver ETF Keep It Up?

Silver and its ETF were among the strongest performers in the first quarter of this year, outperforming most other metal-focused ETFs.

iShares Silver Trust finished up the first quarter 12.3% higher. streetTRACKS Gold Shares, on the other hand, rose 6.5%. Year-to-date, SLV has continued making strides and is up 13.5%. GLD is up 5.8% year-to-date.

Until April 2006, investors only had a handful of ways to get silver exposure, says Don Dion for Seeking Alpha. They could buy the metal themselves, purchase futures contracts, hold stocks in companies with direct exposure to silver companies or invest in funds focused on those companies.

SLV simplifies the equation: By buying a share, you are buying a stake in a cache of silver bullion stored at the London branch of JPMorgan Chase. The price of each share should reflect the current price of 10 ounces of silver, less the 0.5% operating expense of the fund.

The fund's method seems popular, says Dion. So much that it's actually considered to be partially responsible for the steep price increase of silver since the fund's inception.

Sonya Morris at Morningstar says investors would be better off using SLV as a tool of portfolio diversification rather than a hedge against inflation. Silver has industrial uses that make its price prone to volatility as the economy moves back and forth.

The question now is: Can silver keep marching forward, or is the precious metals area due for a correction?

What's next? If inflation continues to loom and global industrial demand continues, the rally could be just getting started. But if the dollar keeps strengthening and the United States crawls out of the doldrums, precious metals might retreat.

Disclosure: Some of Tom Lydon's clients own shares of GLD.

Comments

[deuxsous]

In my personal opinion DBS will be better for US taxable accounts as it holds Comex silver futures (unleveraged, backed by TBills) so 60% of profits will be taxed at long term rates (10-25% tax rate) and 40% at short term rates (10-35%), even if you only hold the stock for ten minutes (or for ten years).

SLV and CEF, which hold silver bullion, are taxed as collectibles at a fixed 38% tax rate on profits, regardless of overall income tax rate otherwise. (With CEF you also have to elect whether to register it with IRS as a passive foreign trust.)

[KOSANN]

THERE IS NO SILVER INVENTORY IN ANY CENTRAL BANK IN THE WORLD.
THE ONLY SILER AVAILABE IS EITHER FROM MINE PRODUCTION-WHICH
IS LESS THAN DEMAND AND HAS BEEN FOR YEARS, OR FROM THAT WHICH IS AT THE COMEX. THE SHORT POSTION IN SILVER IS 50%
OF ALL THE ABOVE GROUND SILVER. THE SHORT POSITION IS IN 8 LARGE HANDS. THIS IS AN ILLEGAL SITUATION, OVERLOOKED BY
THE POWERS THAT ARE SUPPOSED TO BE THE WATCHDOGS. THE
SHORTS WILL BE FORCED TO COVER, THEY HAVE FALLEN INTO
A TRAP OF THEIR OWN MAKING, WITH NO WAY OUT. THE BANKRUPTCIES OF THE SHORTS SHORTS WILL MAKE THE FINANCIAL
MESS LOOK LIKE A PICNIC. SILVER HAS NO UPSID LIMIT, AND NO
DOWNSIDE RISK. BUY THE SILVER ETFs.

[deuxsous]

I still say that if you are interested in making money and banking it after taxes, instead of promoting a dubious silver religion, DBS or old-fashioned long silver futures are better ways to go than tax-inefficient silver ETF's.

Silver weighs tonnes and requires many wheelbarrows to move any significant dollar amount of the physical. Try moving or storing a hundred kilos of silver sometime. Relative to weight, and therefore storage costs, silver is a minor element compared to gold or platinum or osmium. If you want to make some serious money on silver, leverage it up with futures. Otherwise buy silver eagles or bags of rice or cases of motor oil for small money.

[Marol]

Thanks to all of you for what I think will be really useful information, once I figure it out. However, I'm left a bit confused.

Kosann, I like your reasoning, although I've heard a lot about finangling so it's not really being necessary to cover shorts, even under the new rjules. But by "the silver ETFs," which do you mean? And which are you particularly recommending, if any?

Deuxsous (elegant monicker, maybe I'll consider "tuppence"), which exactly are the "tax-inefficient silver ETFs" you're refering to? Isn't DBS an etf?

BTW, I own DBS and did have SLV. What's the difference, given that for now I only hold them in an IRA? (Note that I may have them in another account later, for which the tax info should be invaluable.)

I don't buy futures, but do get options sometimes, so are there any options to recommend? (I suppose LEAPS would be useful, but I don't like to tie up my cash that long.)

In considering these ETFs, I find the implications of future rollover hard to figure out. Does this modify any f your suggestions?



Mr. Lydon, I almost missed this article -- and the comments -- because I thought it was just about Silver-and-Gold (hmm, another possible monicker). As when you compose an email subject line, I'd suggest a title that somehow implied you were also discussing steel and base-metal etfs. Had given up on DBB, BTW, but I'll now recheck it.