3 Ways to Play Silver’s Boom

For investors of precious metals, gold usually gets much of the attention.  Yet silver has actually been the best performer over the past year — over 155%.  At more than $46 an ounce, silver is near its all-time high of $50.35, which was reached in January 1980.

There are some powerful forces driving the price surge.  First of all, silver has many industrial purposes, such as batteries, medical devices and computers.  In fact, it’s a critical component for smartphones. 

Investment demand also has been strong.  The primary drivers are the silver-backed exchange-traded funds. 

And while gold is often considered an alternative to the dollar, there is an argument that silver can also fulfill this role.  During the 19th century, the U.S. and U.K. were both on the silver standard.

How can individual investors participate in the silver rush?  Here’s a look at some of the options:

Miners:  Keep in mind that silver is often a by-product of, say, copper or zinc.  Because of this, there are not many pure-play silver miners.  For example, BHP Billiton (NYSE:BHP) is the world’s largest silver producer – but the precious metal is a small part of its overall revenue.

Despite all this, there are still some good publicly traded silver operators.  And one to keep an eye on is Pan American Silver (Nasdaq:PAAS).  The company operates a variety of mines across the world, which have seen production go from 7.1 million ounces in 2002 to 24 million ounces in 2010.

With a cost of production of $9.51 an ounce, Pan American has been a profit machine.  Last year, the mine’s operating earnings surged 90% to $239.8 million.

Royalty Companies:  These operators provide upfront capital for mines and then take an ongoing royalty payment when production starts.            

A leader in the space is Silver Wheaton (NYSE:SLW), which has interests in mines in places like Mexico, Chile and Argentina.  These involve long-term royalty contracts that have an average cost of $3.90 an ounce.  In other words, Silver Wheaton has tremendous leverage in its business.  Last year, profit more than doubled to $290.1 million and operating cash flows came to $319.8 million. 

Currently, the firm has attributable production of 27 to 28 million silver equivalent ounces.  But by 2015, this is forecasted to reach 43 million.

ETFs:  Some of these allow investors to get ownership in physical silver bars, which is certainly attractive since there is no need for storage and insurance costs.

One popular silver ETF is the iShares Silver Trust (NYSE:SLV), which has about $16 billion in silver bullion.  It is stored in vaults in London, with the supervision of JPMorgan (NYSE:JPM). 

The expense ratio is fairly low, at 0.5%.  Thus, the ETF is an efficient way to track the spot price of silver.

Yet investors need to be aware that the ETF is taxed as a collectible.  This means the maximum tax rate is 28%. 

Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.

Article printed from InvestorPlace Media, https://investorplace.com/2011/04/3-ways-to-play-silvers-boom/.

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