The bullish expectations of monetary stimuli in the U.S., Europe, and China have been fruitful for commodities in general and precious metals in particular, since their demand as an inflation hedge is on the rise. With regard to silver, we expect this price rally to continue if these expectations are realized in the near term. Consequently, given the volatility generally associated with silver, we don't recommend investors take a long position in iShares Silver Trust (SLV), given the fact that it has already risen by almost 20% this year. A better way would be to invest in silver streaming company Silver Wheaton (SLW), which has a strong balance sheet, offers a reasonable dividend yield, has lucrative growth prospects, and is not exposed to the risks associated with a typical mining company.
Recent Developments and Events to Watch For
Tomorrow, a ruling by Germany's constitutional court will decide whether Germany can play its role in terms of contributing to the Euro zone bailout fund. If the country can contribute, it will be a great helping hand for the European Central Bank (ECB), which aims to fight the region's severe debt crisis. Previously, ECB policymakers announced that they would be keeping interest rates low, through an unlimited bond-purchase program, to help Europe fight one of the worst debt crisis in its history.
According to the recently released data from the National Bureau of Statistics, China's industrial output increased in August at its slowest pace in three years, further corroborating the fact that the country is undergoing a severe economic slowdown. Although the recent $157 billion approval for infrastructure spending has been helpful in this regard, President Hu Jintao admits that the economy is facing notable downward pressure, indirectly signaling further stimulus measures to follow this approval.
Meanwhile, the disappointing jobs growth data has fueled expectations of a further monetary stimulus in the United States. The decision of whether or not to take such a step will be made at this week's Federal Open Market Committee (FOMC) meeting.
Precious metals, especially gold and silver, have augmented significantly as the speculations of quantitative easing in the U.S., China, and Europe have increased their demand as an inflation hedge. Consequently, spot gold and silver have recorded an upsurge of 10.5% and 20.5%, respectively, on a YTD basis while COMEX Gold and COMEX Silver contracts, expiring on Dec. 2 (the most active month), have increased by almost 10.5% and 20%, respectively.
Yesterday, holdings of gold-backed exchange-traded funds (ETFs) increased to settle at an all-time high of 72.49 million ounces, while silver net length has also risen for six straight weeks.
Silver -- Where to Go Next?
Hedge funds have increased bullish commodity bets to 16-month highs, as the commodities keep on gaining among speculations of monetary stimuli. One of the most notable gainers is silver, which has surged by a whopping 7.1% last week. We expect further upside for silver prices in this rally, especially if these speculations are realized in this week. However, we are cautious regarding the possibility of producer selling, which can adversely impact investors' long positions. In addition, if these expectations of monetary stimuli are not met, a huge loss is one of the most likely outcomes. Therefore, we don't recommend investing in SLV at this point of time.
We feel that a better way to ride the rally in silver is to invest in silver equities, especially Silver Wheaton. The company has the unique advantage of not being a traditional mining company; it is the largest metal streaming company in the world. It purchases a fixed proportion of future silver production from a mine through an upfront payment, well below the current market value. Its success depends on prices for silver, gold, and other precious metals staying high.
The company's recent quarter saw a 5% year-over-year fall in profits amid low silver prices, although its revenue rose by 3%. The company is going to acquire precious metals streams from HudBay Minerals' Constancia (Peru) and 777 (Manitoba) projects for $750 million. The company's liquidity position is strong, as is evident from its cash and cash equivalents of $600 million (exclusive of $500 million initial upfront payment to HudBay), and an undrawn $400 million credit facility. Its operating cash flows have increased to $172.9 million from $ 168.3 million last year. The company also offers a reasonable dividend yield of 1.1%, and is currently trading at 22 times trailing P/E and 17 times forward P/E.