The stock market rally of the last few weeks seems to really be on no real news. Even earnings reports and outlooks have been less than stellar. What may be being baked into the market is yet another round of balance sheet expanding monetary stimulus in the form of a QE3 from the Federal Reserve, and bond buying from the ECB. This is evidenced by the fact that the market has advanced uninterrupted since the day after the latest ECB meeting in early August. Further stocks in the S&P 500 Index are already seeming to price in the benefits that we have seen from past rounds of stimulus.
Whether QE3 and ECB bond buying stimulus actually happens is still in question. As stocks have began to bake this possibility in, many other key asset classes such as gold, as measured by the (GLD) and (IAU), we have yet to see such moves. In recent articles I have suggested that gold prices could have some tailwinds in the form of inflationary pressures, and have recommended picking up the gold miners as a way to play it. I have also highlighted playing copper as a precious metal play as well as a play on a housing rebound. Now that the stock market has already begun aggressively pricing in more stimulus and having discussed the benefits of gold exposure, in this article, I want to highlight the possible upside in silver, a strong beneficiary of increased stimulus through central bank balance sheet expansion.
Silver is a precious metal with industrial applications. Right now, silver is priced around $28.03 an ounce. Gold is priced around $1615 an ounce. That represents a 57.5 gold to silver price ratio. On its own, it doesn't mean much. However, the historical ratio is 16 to 1. It has not seen this ratio in quite some time and a reversion is well overdue. This can happen only if the price of gold plummets and silver maintains its levels, or silver rises at a higher rate than gold in the next few years. With stimulus and inflation seeming ever more likely, I think silver may be ready to breakout. This "poor man's gold" could make you rich.
The following details my recommended ways to play silver right now.
Physical Bullion or Coins: This is the best way to invest in silver. I encourage people to carry away as much as they can while the prices remain depressed. There are numerous dealers in most cities and of course on the internet where you can buy silver (and gold) physically. There are some who will store it for you (for a fee naturally), others will ship directly to you. Many financial experts recommend holding physical metals as a long term insurance investment. Others recommend it in case of a total meltdown of the fiat currencies and modern financial systems we have. If you decide to invest, please buy from a reputable dealer. This is especially important if you're purchasing over the internet. Look for a well established dealer with a long history and stability in the business. The dealer should be able to tell you the price of your items, whether they are in stock, and the estimated ship date. The only downside is expensive shipping and insurance costs, and there is often a minimum purchase. Whenever possible, buy locally to avoid excessive fees.
Silver ETFs: One option for those who can't (or won't ) purchase physical silver is through an ETF. The iShares silver trust (SLV) 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 $8.8 billion in assets, with an annual expense ratio of approximately 0.5%. Shares in SLV currently trade at $27.30, and have a 52 week range of $25.34-$42.77.
ETFS Physical 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 Trust is governed by the Trust Agreement. 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 of beneficial interests in the shares an opportunity to participate in the silver market through an investment in securities." The Trust has far less in assets of about $600 million relative to SLV, but also has an expense ratio of 0.3%, 20 points lower than the SLV. Over the recent months however, SLV has outperformed SIVR. SIVR currently trades at $27.90, with a 52 week range of $25.92-$43.62.
There are other ETFS that invest in (or invest against) silver, and they are riskier and are my least recommended silver ETF plays.
ProShares Ultra Silver (AGQ): This ETF is leveraged; it 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 (200%) 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 the financial instruments (swap agreement, futures contracts, forward contracts, option contracts)." It currently trades at $39.57 and has a 52 week trading range of $34.45 to $127.08.
ProShares Ultra Short Silver (ZSL): This fund is another leveraged ETF, applying a 2x leverage against the price of silver. The investment seeks "to provide daily investment results (before fees and expenses) that correspond to 200% the inverse of 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 the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund's benchmark." It currently trades at $63.00 with a 52 week trading range of $40.60-$110.65.
Powershares DB Silver (DBS): The investment seeks to "track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index - Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver." It currently trades at $48.49 with a 52 week range of $45.06 to $76.98.
If you are bullish on the price of precious metals, then it is hard not to consider the miners. Having written extensively about the gold miners, I believe the following three silver miners represent good value for your consideration right now.
Silvercorp Metals (SVM): SVM engages "in the acquisition, exploration, development, and mining of precious and base metal properties in China and Canada. It operates four silver-lead-zinc mines comprising the Ying, TLP, HPG, and LM mines located in the Ying Mining District in the Henan Province of China. The company also holds interests in the XBG silver-gold-lead-zinc mine with a mining permit covering 26.36 square kilometers (km2); and the XHP silver-gold-lead-zinc mine comprising a 14 km2 mining permit located in the Ying Mining District in Henan Province of China. In addition, it engages in operating the BYP gold-lead-zinc project in Hunan Province, and mining at the GC silver-lead-zinc project in Guangdong Province in China. The company was formerly known as SKN Resources Ltd. and changed its name to Silvercorp Metals Inc. in May 2005. Silvercorp Metals Inc. is headquartered in Vancouver, Canada." It currently trades at $5.40 with a 52 week trading range of $4.89-10.08, with average volume of 1.2 million shares exchanging hands daily. It has a multiple of 17, but a high PEG of 4.3. It yields 2.0% annually.
Pan American Silver Corp (PAAS): PAAS explores, "develops, and operates silver producing properties and assets. The company engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico. Pan American Silver Corp. was founded in 1979 and is headquartered in Vancouver, Canada." It currently trades at $16.42 a share with a 52 week range of $13.49 to $34.39. It trades at an 8.3 multiple, a 1.45 PEG ratio, and yields 1% annually.
Silver Wheaton (SLW): SLW isn't a traditional miner per se, but operates as a silver streaming company worldwide. Silver streaming is basically a process by which the company purchases a mining firm's silver production in order to refine and distribute the silver. The company has "14 long-term silver purchase agreements and two long-term precious metal purchase agreements whereby it acquires silver and gold production from the counterparties located in Mexico, the United States, Greece, Sweden, Perú, Chile, Argentina, and Portugal. Silver Wheaton Corp. is headquartered in Vancouver, Canada." It currently trades at $31.83 and has a 52 week trading range of $22.94 to $42.50. On average about 4.2 million shares exchange hands daily. The company trades at a 20 multiple, but only a 0.82 PEG ratio. It currently yields 1.2%.
Finally, If you cannot decide on one miner, but would like exposure to all silver miners, I recommend the silver mining ETF (SIL).
Bottom line: Silver may be known as a poor man's gold, but I think its time has come to make investors rich. At the least, it offers terrific insurance for one's financial future. I recommend picking some up right now at current levels, preferably via physical bullion and coins, followed by a silver ETF, and lastly through the miners.