This year has been hard for commodities, and silver is not an exception. The precious metal is down 20% year-to-date. For some weeks, silver has been trading lower than in 2012, and it has dropped back to prices not seen since the end of 2010. The drop gained speed in April, partially fueled by the drop in gold prices after the release of China's first quarter GDP results.
Silver demand comes from many sources. Silver is used in multiple industrial applications, photography, jewelry, cutlery, coins, medals and for investment purposes. One could expect large shifts in demand or supply that caused big price fluctuations, but there were none. In fact, Thomson Reuter GFMS expects demand to recover in 2013. Earlier this year, the US Mint had to suspend sales of its American Eagle silver bullion coins after running out of stock due to investor demand. I think that the drop in prices would help the demand to pick up, not only on the investment side, but on the jewelry side as well.
In my opinion, recent silver moves were a result of speculative activity and not the result of a fundamental shift in either demand or supply. I do not see any deterioration from the situation that was in the silver industry in 2012. Last year, silver mostly traded between $26 and $35. This year, it has touched $22 and is trading below $25. If you expect silver to rebound from current levels, there are several ways to play this possible rebound.
1. Silver ETFs. iShares Silver trust (NYSEARCA:SLV) seeks to reflect the price of silver. There is a minor difference in performance between silver and SLV. SLV is down more than 21% year-to-date, while silver is down only 20%. The sole asset that the fund holds is physical silver bullion (fund assets sourced from Yahoo! Finance). ProShares Ultra Silver (NYSEARCA:AGQ) tries to reflect results that are twice the daily performance of silver bullion. The fund assets consist mostly of forwards contracts. AGQ is riskier than SLV by nature. It is more speculative and does not always reflect the 2 to 1 ratio between the price of AGQ and the price of silver that it seeks to represent. For example, when silver touched $50 back in 2011, AGQ was as high as $190. This was almost 4 times the price of silver. I would recommend AGQ to investors that have more risk tolerance. If you believe that the silver prices will rise, SLV is a must for your portfolio. There is no better way to play the rise of the silver prices than to buy an ETF that owns physical silver.
2. Silver miners ETF (NYSEARCA:SIL). SIL is down 35% year-to-date. SIL is less liquid than most of the silver stocks. I advise to look at specific stocks rather than buying SIL.
3. Silver streaming company. Silver Wheaton (SLW) is the world's largest silver streaming company. The unique business model of the company keeps it free from the necessity to manage and operate mines. I think that SLW is a buy at current prices.
4. Silver mining companies. Let's take a look at highly liquid silver mining stocks that have an average trading volume of more than 1 mln shares per day. These stocks are: First Majestic Silver (NYSE:AG), Coeur d'Alene Mines (NYSE:CDE), Endeavour Silver (NYSE:EXK), Hecla Mining (NYSE:HL), Pan American Silver (NASDAQ:PAAS), Silver Standard Resources (NASDAQ:SSRI) and Silvercorp Metals (NYSE:SVM).
|Stock||Forward P/E||P/B||Current Ratio|
(data sourced from Yahoo! Finance)
EXK has the most attractive by forward P/E. SSRI is the most undervalued stock by the price-to-book ratio. PAAS has the best current ratio, which measures the company's ability to pay short-term obligations. HL, SSRI and SVM are the most punished stocks this year. There is a chance that if the silver prices go up, these stocks would be faster too rebound, as they were hit the most. It is important to mention that EXK, HL and SVM are trading near or below $5 mark. These stocks are not suitable for risk-averse investors. There could be big daily fluctuations in the price of these stocks because they are cheap. HL, PAAS and SVM pay dividends. HL's dividend is small and yields only 0.31%. The dividends of PAAS and SVM yield 3.94% and 3.51% accordingly.
How do you construct your portfolio to benefit from the rise in silver prices? I would present both conservative and aggressive version of such a portfolio. The conservative one would include SLV, SLW, AG, CDE and PAAS. The aggressive one would consist of AGQ, EXK, HL, SSRI and SVM. As you can see, the difference is mostly in the share price of the companies. Cheaper stocks imply greater risks and bigger rewards. The aggressive portfolio has an ETF that moves at least twice as fast as the price of silver. If you do not want to construct a diversified portfolio, but still want to bet on the rise of the silver price, the surest way to do this is to buy SLV or AGQ.
Disclosure: I am long SLV, SLW. 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.