The best way to bet on silver

You’ve no doubt noticed that we like gold.

But what about gold’s ‘little sister’ metal, silver?

Silver investors have had a maniacal ride in recent years. Last year, in April, it hit a 31-year high of $49.845 an ounce. That was short-lived, and now it’s trading at closer to $28. That’s still well above its 20-year average of around $10. 

So does silver look like a good bet now?

The biggest difference between silver and gold

I’m not as keen on silver as I am on gold. For one thing, it’s more volatile, which is never good for the nerves. But the main reason is because it’s not a pure ‘monetary metal’ play.

I like gold because it is a useful hedge against currency collapse. It has historically been used as a currency, or to back currencies. So when people get worried about the integrity of ‘fiat’ currencies (because governments won’t stop printing money, say), then gold should do well. It’s almost like insurance for the rest of your portfolio.

Silver has had a monetary role in the past too. However, unlike gold, there are other aspects to worry about as well. The problem with silver is that while it’s a monetary metal, it’s also a widely-used industrial metal. So when commodities like copper sell off, and people worry about industrial demand, silver gets hit harder than gold.

So while I know this won’t be popular with fans of silver, if you’re looking for a hedge against ‘fiat’ money collapsing, then gold is the metal for you. Silver should be your second choice.

Having said that, I can see a good argument for holding both just now. Here’s why.

The global economy is clearly slowing down. Japanese GDP disappointed yesterday. Britain’s in recession still. Europe is in a mess. Even the US is looking more fragile than it has in a while.

The major central banks (well, except ours) have held off on printing more money for now. The US is paralysed by politics. The Japanese central bank is as cautious as ever.

But more than anything else, they want the Europeans to do something. If the other banks print money before Europe does, they risk any burst of enthusiasm being swallowed up by another pit of despair opening in the eurozone.

So they’re crossing their fingers and hoping that Europe will be forced to act. They might even try another “shock and awe” burst of co-ordinated global money printing if the European Central Bank (ECB) does swing into action. That sort of co-ordinated currency debasement would be good news for gold.

However, even if that doesn’t happen, I suspect that gold will see another burst of investor enthusiasm before long. Because if the ECB keeps sitting on its hands, and stock markets lose faith and tumble, then the Federal Reserve is likely to lose its nerve and decide it simply needs to print.

If that happens, then I’d expect silver to be dragged higher along with gold. As Frederique Dubrion of Blue Star Advisors tells Bloomberg: “The main negatives are still in industry. We’re waiting for more quantitative easing, and that would be really positive.”

Not everyone agrees. Hedge funds are apparently the “least bullish on silver in almost four years”, according to Bloomberg. But I wouldn’t worry about that. Hedge funds probably think of themselves as being the ‘smart’ money, but the evidence to back that up is thin on the ground. 

So what’s the best way to back silver?

Why this miner is the best way to bet on silver

Buying physical silver is not as attractive as buying physical gold because you have to pay VAT on it. However, as my colleague Bengt Saelensminde has noted before in his free Right Side email, you can sometimes buy antique silver very cheaply compared to the silver price.

You can also use an exchange-traded fund (ETF), as long as you don’t mind a bit of volatility. I wouldn’t spread bet silver though. It’s possible, of course, but silver is so volatile – far more so than gold, platinum or palladium, according to Bloomberg data – that adding even more risk to the pot by spread betting it just seems to be asking for trouble.

So these are all ways to get exposure to silver. However, for me, the best way to bet on another rally in the silver price is via mining group Fresnillo (LSE: FRES).

The company is the world’s largest producer of silver. As US financial paper Barron’s notes, it can dig silver out of the ground for $5 an ounce. With the silver price up over $25 an ounce, that gives it a pretty wide margin of safety.

Better yet, and unusually for a miner, it pays a half-way respectable dividend yield of around 2.5%. As I see it, you’re being paid to hold silver, something you won’t get from the physical metal or the ETF.

If the silver price goes up, Fresnillo should benefit. If it goes down, it won’t be good news for Fresnillo, but it won’t be the disaster it might be for some other mining companies. And in the meantime, you’re getting paid to wait.

Fresnillo is also a favourite of MoneyWeek regular Tim Price. Tim writes The Price Report newsletter, and he’s recently released a video presentation I think you would find interesting. You can take a look at it here.

Follow John on Twitter || Google+ John Stepek

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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8 Responses

  1. 14/08/2012, Bob wrote

    I would have thought that in a stock market crash the rush for the exits would result in both silver and gold crashing as people need to sell to get cash to pay their margin calls on stocks? Or am I missing something?

    Good to hear about a company you can buy in silver that is in Sterling, as opposed to losing money buy such companies in US Dollars. Looking at the share price it looks like June would have been the buying opportunity or perhaps, as it appears to be turning down, this September? Ooh err.

  2. 14/08/2012, Benny wrote

    Tim has been banging on about Fresnillo for a while.

    But recently costs have gone up about 35%.Silver price is down.

    Gold production has gone up as has prices.

    The exchange rate between the Mexican peso and the USD needs watching.

    The potential upside for a silver investor is higher but more volatile.

    An article I read says gold could go up to $5000/oz and silver $250/oz.

    I have no idea if that is right but the maths are obvious aren’t they?

  3. 14/08/2012, Guy wrote

    John ends his article by saying that “If the silver price goes up, Fresnillo should benefit”. You would think so, wouldn’t you? However, that has definitely not been the case with the gold price and gold mining shares which (is well documented) have become completely detached from each other. As gold has gone up, gold miners have gone down. Anyone who like me, invested in Blackrock’s Gold & General fund for example a couple of years ago, hoping to benefit from the rising gold price has been sorely disappointed and suffered a major loss of capital.

  4. 14/08/2012, Nic wrote

    Unlike gold, silver is ‘consumed’. That is, we use it up and it is gone. And we are using it up a rate that most of us will notice. Industrial use of silver due to it’s properties of being the most heat conductive, and most reflective metal there is means that there is no substitute in it’s industrial application (circuits, thermonuclear power, computers, medical, etc). Gold on the other hand is not consumed as silver is, and in fact 95% of all the gold that has every been dug up is still in existence (gold watches, jewelry, and all the gold reserves held in vaults around the world. So if I had to choose between a precious metal that is extremely rare and one that is abundant, I would go for silver. It is a long term play. 5 -10 years at least. But once investors start to get a whiff of what is going on (only 5% of trade is speculative currently) then you will see silver really take off.

  5. 14/08/2012, Elvis Presley wrote

    I think I’m right in recalling this was a ‘sell’ in one section of MW (Paul Hill) a while ago; the price – around £4.30.

    The gold miners’ disconnect with the POG is a real disaster story – no wonder Dom has gone off to rehab or where ever he is.

  6. 14/08/2012, devonian wrote

    My understanding is that silver metal purchases are subject to VAT only if you take delivery of them (would you want to risk storing them at home?).

  7. 15/08/2012, QuantumDealer wrote

    Forget about Fresnillo…go with Silver Wheaton instead.

  8. 15/08/2012, Pusser wrote

    I think I will pass on this one. Quite sometime ago Pennisula Gold was a must buy as recommended on here. I thought I would test the waters and found that investing £500 at the time has magically been turned into £182 today. I was wondering if this company has broken its spade.

Commenting on this article closed

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