The Bullish Case for Silver

by Jeff Reeves | June 8, 2012 6:15 am

Some investors think silver has lost its luster. The precious metal currently is priced around $29 an ounce, flat from where it was to start the year and down about 20% from peak levels in the spring.

What’s more, silver is off about 50% from a peak of $48.70 or in April 2011. Ouch.

But there’s a convergence of trends going on right now that hint at a reasonably bullish market in silver on the horizon. Thanks to the unique characteristics of this metal, demand-side pressures and overall market trends, it could pay off to dabble in silver stocks or funds.

It’s a risky play, no doubt. All commodity-based investments tend to be volatile. But here are a few reasons you might want to consider delving into silver:

Real, Practical Demand

Silver, unlike gold, has real-world uses. It’s one of the most conductive metals out there and a key part of many electronics and batteries. It remains in high demand for film photography applications, even in a digital age. Silver even has antibacterial qualities, making it an important element of surgical tools and other medical devices.

The biggest growth area is, of course, in tech. For instance, roughly 6 cents of silver[1] is used in each cell phone, according to industry reports. That doesn’t sound like a lot, but there were almost 6 billion mobile subscribers[2] around the globe in 2011. For those of you bad at math, that equals $360 million of silver in those devices.

And that’s only accounting the active smartphones out there. There is a lot of silver in old cell phones, photography chemicals or medical devices that already has been taken out of the market. Yes, there is a push to recycle electronics and reclaim costly elements like silver within them — but in cases when silver is used in very small portions, it isn’t cost-effective or even practical to recover the silver.

That means some silver isn’t just purchased but truly “consumed,” taken out of circulation entirely and impacting supply. That is a vastly different dynamic than a precious metal like gold.

An Inverse Play on Base Metals

I recently interviewed Randy Smallwood[3], the CEO of metals powerhouse Silver Wheaton (NYSE:SLW[4]). He shared a fascinating tidbit about silver production and its relationship with base metal mines.

Smallwood told me that a relatively small portion of silver actually comes from dedicated silver mining operations, and roughly 60% comes from base metal mines. In other words, when copper or lead mines are operating, they also tend to produce small portions of silver and deliver it to market — even though that’s not their primary focus.

“The supply side has this natural restriction because copper mines don’t change their production when silver prices go up,” Smallwood said. “They’re driven by copper prices. The lead-zinc mines don’t change their production plans or rates because of silver prices. Again, they are driven by lead prices or zinc prices.”

So what happens when base metals are in a period of soft demand, as they are now, and miners curtail their production of copper and lead? Silver production naturally suffers as a result — and that hurts global silver supply.

It’s a fascinating dynamic many investors aren’t aware of, and certainly worth noting.

A Lack of Options

Of course, one of the biggest reasons to seek out silver right now is psychological. There is a lot of risk in the market regarding sovereign debt in Europe[5] and the specter of devalued currencies, and that naturally sparks a run to “save haven” investments like gold and silver.

CDs yield 1.75% at best. Treasuries yield around 1.5%[6] for the 10-year T-Note. Equities are risky and have given up their gains since January …

Where else are you going to park your money?

There always is a risk, and I certainly am not one of those precious metal nuts who believe silver is such a store of value that it can never decline or lose you money. It can, and it might.

However, it’s undeniable that the options out there aren’t so hot. So why not consider a play on silver?

How to Buy Silver

A number of options are out there for investors looking to play silver:

Physical silver: The larger iShares Silver Trust (NYSE:SLV[7]) and the ETFS Silver Trust (NYSE:SIVR[8]) are similar to the SPDR Gold Trust (NYSE:GLD[9]) in that they hold the actual metal as an underlying investment[10]. For folks who want to own physical silver but don’t want to store bars or coins, it’s a decent option.

Silver miners: The Global X Silver Miners ETF (NYSE:SIL[11]) is the easiest way to get diversification on the miners. But if you want to dabble in specific silver-producing stocks, a short list includes Coeur d’Alene Mines (NYSE:CDE[12]), Hecla Mining (NYSE:HL[13]), Pan American Silver (NASDAQ:PAAS[14]) and Silver Standard Resources (NASDAQ:SSRI[15]).

Leveraged silver funds (For aggressive investors only): If you’re a super-aggressive investor looking for a short-term, directional bet on silver, the ProShares Ultra Silver ETF (NYSE:AGQ[16]) will attempt to deliver twice the returns of the precious metal and the ProShares UltraShort Silver ETF (NYSE:ZSL[17]) will attempt to deliver twice the inverse of silver so you profit as silver falls. But beware: Double the movement means double the losses when your bet turns out to be wrong. Also, the 2x relationship is anything but exact and the fees are steep, so holding these investments in the long term can cause any profits to decay, even if you are right.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[18] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

Endnotes:
  1. 6 cents of silver: http://www.eoearth.org/article/Cell_phone_recycling?topic=49558
  2. 6 billion mobile subscribers: http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats
  3. interviewed Randy Smallwood: http://investorplace.com/2012/06/how-to-buy-silver-for-just-4-an-ounce/
  4. SLW: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLW
  5. sovereign debt in Europe: http://investorplace.com/hot-topics/europe-in-crisis/
  6. Treasuries yield around 1.5%: http://investorplace.com/2012/05/278-dividend-stocks-yielding-more-than-10-year-treasurys/
  7. SLV: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLV
  8. SIVR: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIVR
  9. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD
  10. hold the actual metal as an underlying investment: http://investorplace.com/2012/02/2-easy-ways-to-invest-in-gold-gld-iau-gdx-gdxj/
  11. SIL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIL
  12. CDE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CDE
  13. HL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HL
  14. PAAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=PAAS
  15. SSRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSRI
  16. AGQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGQ
  17. ZSL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZSL
  18. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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