Over the past few weeks, I have discussed a number of things that could prove to be quite positive for gold (GLD) going forward. I have largely failed to relate any of those to silver (SLV), even though both precious metals are generally considered to be a store of wealth and have traditionally been used as money over much of human history. Silver, however, is also an industrial metal, and this provides some demand-side pressure for the metal. In this article, we will discuss some of the reasons why investors may want to take a position in the metal and, specifically, discuss what is perhaps the best alternative to actually holding the metal. This alternative is the Sprott Physical Silver Trust (PSLV).
About The Fund
As I have discussed in a few previous articles, such as this one, all three of the Sprott closed-end bullion funds have advantages over exchange-traded funds like the iShares Silver Trust ETF. One of the most important of these to many precious metals investors is the fact that shares of the fund can be redeemed for the actual physical metal on a monthly basis. This should assuage the concerns that some investors have expressed about the ETFs that the fund might not actually have all of the physical metal that it claims to have. In this case, every month an investor can convert their shares of the fund into physical silver from the fund's vault, which consists of London Good Delivery bars. A London Good Delivery silver bar contains a minimum of 750-1,100 troy ounces of 99.90% pure silver. It is certainly not cheap to do this conversion, as one of these bars is worth a minimum of $11,287.50 at today's prices, but the fact that the option is there should provide reassurance that the fund actually has the silver that it claims to.
Also, unlike the ETFs, the physical silver is held in a fully allocated account at the Royal Canadian Mint (the fund's custodian). This differs from the ETFs in that those funds store their silver in unallocated accounts with their respective custodians. The difference between these is that in an allocated account, the account holder actually holds the title to the precious metals, and would therefore receive the actual metals if the custodian goes bankrupt. In an unallocated account, the fund is essentially owed a certain amount of metal by the custodian and would become an unsecured creditor in the event of the custodian's bankruptcy. Clearly, a precious metals investor would rather have a fully allocated account for their metals storage.
Another advantage that the Sprott Physical Silver Trust has over the ETFs is the fact that it has a closed-end structure. As any closed-end fund investor should know, these entities do not always trade at net asset value, and in many cases, trade for less than this value. When we consider that shares of the fund are redeemable for physical silver, this can essentially allow investors to obtain silver for less than it is worth. This has obvious appeal and is one reason why we should always try to buy shares of PSLV at a discount.
Reasons To Invest In Silver
I have been making the case for gold in a few recent articles, and at least some of these bullish arguments apply to silver as well. This is due to the fact that silver is also a precious metal like gold, and so, should prove to be rather inflation-resistant. This is good for the current environment, since it does look increasingly likely that the Federal Reserve and the United States government will be continuing to grow the money supply at a fairly rapid rate.
Perhaps the most comprehensive measure of the money supply that we have is M3, which includes all of the components of M2 plus large time deposits, institutional money funds, short-term repurchase agreements, and deposits at non-bank financial institutions. As we can see here, the M3 money supply has very nearly doubled over the past ten years as the Federal Reserve flooded the financial system with newly created money:
Source: Federal Reserve Bank of St. Louis
Basic economic theory tells us that the result of this should be inflation. This is due to the fact that we have a larger amount of money chasing after the same amount of goods and services. Curiously, official measures state that inflation has been nearly non-existent over that period. We do clearly see the effects of this money pumping in the stock market as well as in real estate prices in certain cities, however.
It seems likely that one of the reasons why this money supply growth has not caused inflation to a greater degree is that so little of it has entered into the real economy. Over the past few years, we have seen a surge in stock buybacks and even dividends, but the majority of money distributed in this way goes to people with a low propensity to spend. Meanwhile, wages and other things that would have resulted in more spending on consumer goods have been relatively stagnant. This is one reason why the velocity of money has declined over the past ten years:
Source: Federal Reserve Bank of St. Louis
The velocity of money is the rate at which people are actually spending money in the economy. If this goes down, then logically we do not have the problem of more money chasing a finite supply of goods that causes inflation.
There are some signs that this is beginning to change, however. As I discussed in a recent article, there are many politicians in Washington that are proposing the creation of new money to fund their own political projects. As some of these projects do involve giving the money to people that will spend it, this is much more likely to generate inflation. Silver prices should go up if inflation does, as there will be more money chasing a finite supply of silver. This is doubly true because silver is a component in many consumer electronic goods, which more people will likely want to buy with this printed money.
We also have the Federal Reserve itself stating that it will not be able to completely turn off the money printing programs that it used to combat the Great Recession. This is evident in the fact that the Federal Reserve halted its planned 2019 interest rate hikes earlier this year because such actions are "too damaging for the economy." This poses a problem because the central bank may not be able to cut interest rates enough to fight the next recession, so it will be forced to print money to maintain the nation's economy.
As mentioned earlier, the fact that PSLV is a closed-end fund gives it some advantages in terms of valuation. This is because these funds do not always trade for the actual value of their assets. We can see this by looking at the fund's net asset value per share, which is the current market value of the silver sitting in the vault divided by the number of fund shares outstanding. As of the time of writing, the fund has a net asset value of $5.61 per share. As PSLV is currently trading for $5.46 per share, investors can essentially obtain the silver owned by the fund at a 2.71% discount. It is always nice to obtain something for less than it is worth, and the market looks to be handing investors a nice opportunity here.
In conclusion, the Sprott Physical Silver Trust looks like the next best thing to actually having the physical metal in your possession. This is due to the fact that the fund actually does hold title to the metal in its vault and even allows investors to redeem their shares for the physical bullion. The fact that the fund is selling at a discount to net asset value is also appealing. When we consider that the money supply is likely to continue to expand and inflation is likely to set in, all investors should have some exposure to precious metals to protect the money that they worked hard to earn. This fund is one way to accomplish that.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: I may purchase precious metals at any time but I have not yet committed to a purchase date nor decided whether I will buy physical bullion or a fund like PSLV or PHYS. I will not be purchasing one of the ETFs.