It appears as though the silver market is once again heating up and, given the latest round of global central bank money printing that will soon have the world awash in hundreds of billions if not trillions more in new paper money, a surging gold price is likely to pull silver up along with it in a long-awaited sling-shot effect following an arduous 18-month correction.
So, what sort of silver should you buy if you're thinking about participating in this move higher?
I've long recommended to investors to first buy and hold as much physical silver in coin and/or bar form that they are comfortable storing - whatever amount that may be - and then fill out their silver bullion asset allocation - whatever that might be - using one of the popular ETFs.
I have some pretty strong feelings about precious metals asset allocation, but we'll leave that for another day ...
As opposed to gold bullion, physical silver can be problematic for individual investors to store simply due to its bulk, however, it has many important qualities that "paper" silver doesn't provide, the most important being the ability to easily reach out and touch the metal.
I've owned 100 ounce silver bars and "junk silver" (i.e., pre-1965 coins that are 90 percent silver) for many years and don't plan to get rid of them anytime soon, though I did sell quite a few 100 ounce bars in the spring of 2011 after prices nearly reached $50 an ounce and replaced them earlier this year with the paper variety.
But, if you're going to buy a silver ETF, which one should you buy?
After following the Sprott Physical Silver Trust (NYSEARCA:PSLV) since it was launched back in late-2010, I recently switched most of my holdings in the iShares Silver Trust ETF (NYSEARCA:SLV) to PSLV and this change was due almost exclusively to PSLV's historically low premium that is likely to rise during the next major move higher for precious metals.
There are other reasons to favor PSLV over SLV and, in my view, some of them are valid (e.g., potential tax advantages) while others are not (e.g., the belief that PSLV actually holds the metal, whereas SLV does not).
But, after looking at the performance of PSLV as shown in the accompanying charts, my decision was really just based on the shrinking premium as reported at the Sprott website, from which the graphic below was extracted.
At around four percent, this is down from the 20+ percent premium seen at various times in recent years, such as during the silver frenzy early last year, and it is just a fraction of the long-term average of around 15 percent.
Truth be told, I see no real reason for there to be a huge PSLV premium (but others have in the past and certainly will again) and their ranks should swell on the next major move higher for the metal, one that will probably only come when the gold price moves up toward $2,000 an ounce since last year's solo silver price spike is not likely be repeated.
PSLV is a silver fund that is growing in size and popularity as another public offering over the summer pushed its holdings to more than 1,200 tonnes and its net assets well over $1 billion. Choosing PSLV over SLV offers the potential to pay only 15 percent capital gains tax instead of a collectible tax of 28 percent in the U.S., the option to redeem PSLV shares for the metal, and the comfort of knowing that this silver is stored at the Royal Canadian Mint rather than being under the auspices of JP Morgan or HSBC, shifting the counter party risk from an investment bank to the Canadian government.
Of course, the premium moves up and down because this is a closed-end fund, meaning that, only the fund's managers can buy and sell silver for the trust and, as a result, from time to time, supply/demand mismatches develop and the PSLV price can move dramatically relative to the price of the underlying metal.
In contrast, most other precious metal ETFs allow "authorized participants" to buy and sell metal for the trusts, quickly arbitraging away any price differences that develop between the spot price of the metal and the price of the ETF shares.
As shown below, PSLV has outperformed SLV slightly since its inception and both funds trail spot silver, as would be expected since management fees will eat into returns over time, more evidence that, over the long-term, physical bullion is still your best bet.
Though you get slightly different results depending upon your exact start and stop dates, from the close on October 29th, 2010, while spot silver has gained almost 45 percent, SLV is up 39 percent and PSLV is 40 percent higher.
Overall, I see little downside to having made the switch from SLV to PSLV as I don't think the premium will go much lower until the long-term precious metals bull market is over and there should be tremendous upside potential via rising premiums when the ongoing gold/silver market correction runs its course - which now appears to be the case - and moves on to make new highs.
It's a bit maddening to see the PSLV premium jump around as it does, for example, last week, while spot silver fell three cents per ounce and SLV ended the week where it began, PSLV lost nearly one percent as the premium went from over four percent to under four percent.
I'm pretty sure moves like this won't be much of a bother when the PSLV premium is some multiple of its current value.
Disclosure: I am long PSLV, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I also own silver coins and bars