The best ways to invest in silver

Silver continues to frustrate.

Like the sylph that winks at you from behind a tree, cajoles you with seductive promises and then leads you up the garden path, silver is the metal that promises riches beyond your wildest dreams – and rarely delivers.

Today, we consider whether it’s time once again to let the silver sylph seduce us.

There are countless reasons to own silver, yet still it disappoints

Silver is in demand as an industrial metal. Every year, silver finds more and more use in a range of applications from biotech to electronics.

Computers, smart phones, tablets – they all need silver. And the Chinese are buying more of the stuff we take for granted – from medicine to jewellery to optics to investment to whatever else it is that silver gets used in.

There’s not enough silver to meet demand. Quick! Buy silver.

Silver is also a monetary metal. ‘Silver’ means ‘money’ in some 90 or more different languages – argent, plata, shekel. Debt levels are unsustainable, we’re headed for a monetary crisis. Quick! Buy silver.

The silver exchanges are manipulated, the price is suppressed, there isn’t the silver to deliver on the silver that’s been sold. We’re headed for the mother of all short-squeezes. Quick! Buy silver.

Miners are struggling to find new silver deposits. All the stuff near the surface has been mined. Funding for exploration has dried up. Where’s the new silver going to come from? Quick! Buy silver.

All these reasons and more to own silver. Yet it languishes around $20 an ounce, like a drunken gunslinger in a hammock remembering former glory days, unwilling to move.

Even this year, it has frustrated investors. Silver is gold on steroids we are told. What gold does, silver will magnify. Is that so? Gold is up about 12%. Gold miners 25%. Junior gold miners 36%. Silver – just 10%.

What then is the point of all those extra storage costs? Not to mention the VAT. Aaaargh! Wretched silver. The day I dispose of mine will be the day before all its promises come true.

So what’s next on the cards for this ever-frustrating metal?

At present the gold-silver ratio (that is, the price of gold divided by the price of silver) is in a clear upward trend. In other words, gold is outperforming silver, and the trend suggests it will continue to do so.

On the chart below, I show the ratio between gold and silver over the last ten years. The red line is the 52-week moving average – it’s rising. And the parallel blue lines I have drawn to identify the current trend.

You can see the average went as low at 32 – ie 32 ounces of silver per ounce of gold – when silver hit $50 back in April 2012. Since then the outperformance of gold is clear to see. It now sits at 65 ounces of silver per ounce of gold – a double.

You can also see the point of maximum extremity it reached during the credit crisis of 2008 – 92.5 ounces of silver per ounce of gold.

Silver price chart © StockCharts

Source: StockCharts.com

How long will this trend continue for? Your guess is as good as mine. But I have 72 as a target, for what it’s worth.

At present silver is doing its usual thing and having trouble deciding if it’s an industrial metal, like copper or iron ore, both of which are having a rotten 2014, or if it’s precious.

The ideal environment for silver is one of clear inflation – as there was between 2009 and 2011, busting out of the deflationary bust that was 2008. Or, better still, in the craze of 1979-80.

During periods of so-called disinflation or deflation, you’re better off with gold, if you have to own just one of the two.

Silver’s time will come again, of that I have no doubt. But for now you’re better off with gold or gold miners (more on that another time).

A potential trade in silver

That said, based on recent price action, there is a trade to be had in silver. Look at this five-year chart. The red band was resistance back in 2010 and 2011. Now it has become support, as demonstrated by the blue arrows.

Silver price chart © StockCharts

Source: StockCharts.com

The low-risk trade is to buy silver as close to that red band as possible and place your stop just below it. If $18-$19 doesn’t hold, the game is over. If it does hold, $26 is a reasonable short-term target.

But if I add a simple trend line to that chart and remove the red band, things look rather more ominous. Here we see the same chart, with a trend line drawn down from the 2011 highs. Silver re-tested that trend line last week (where I have circled) and failed. This portends lower prices.

Silver price chart © StockCharts

Source: StockCharts.com

It shows how you can manipulate the same chart to suit whichever bias you are hoping to confirm.

But a break above that blue line may well be worth buying.

Back in July I wrote about how the total absence of funding for lead and zinc pointed to significant shortfalls in the years ahead (existing mines are closing, development projects are being halted, funding for exploration has disappeared).

That story has not changed significantly. And given that silver occurs with lead and zinc, this absence of investment is also bullish for silver in the longer term.

But given its volatility, the way to play remains to own silver and sell when it spikes. I’m not sure the conditions are quite ready for a mammoth silver spike, but some gentle appreciation seems possible.

You can buy and store physical silver online with a company such as Goldcore, BullionVault or Goldmoney without incurring VAT. Likewise, you can buy silver through a London-listed ETF, via your broker. You can buy physical silver through a bullion dealer such as Baird’s. Or you can do what some people do, go down the antiques market and try to pick up old silverware at below its spot price.

There’s also the option of silver miners, which are a whole risk in themselves. First Majestic (TSE:FR; NYSE:AG) is the stand-out pure play, though its cash holdings are down notably. Impact (TSX.V:IPT) is a dependable small cap producer. And Santa Cruz, (TSX.V:SCZ) with its quality assets and management who don’t seem to deliver, has got take-out written all over it.

• Life After The State by Dominic Frisby is available at Amazon. An audiobook version is available here. He is crowd-funding his next book, Bitcoin – the Future of Money.

• Follow @dominicfrisby on Twitter.

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7 Responses

  1. 12/03/2014, Argentgrabber wrote

    Quite recently an American Bullion dealer was on the street close to his salesroom and attempting to sell genuine 1 oz American Eagle Silver coins for 99 cents each. He was getting zero interest from the public until a German bought one – reason being he thought it was a good souvenir to take back home. The Western public at large are totally ignorant of Silver and Gold, the big media are loath to mention it. Finance people want to churn your savings. Benefit from this buying as much as you can afford at these prices despite 20% vat on Silver bullion it is a steal. Needless to say I hold Tonnes !

  2. 12/03/2014, CKP wrote

    I can only see silver prices increasing in line with cost of production. No industry has yet emerged to replace the lost silver demand that has resulted from the demise of film based photography – which was by far the biggest consumer. Yes it’s nice to look at but needs regular cleaning so not even many ornaments made with it these days. It really is a barbarous relic. The VAT rather destroys the investment case for bullion, would you buy anything that has a minimum spread of 20%?

  3. 13/03/2014, flier wrote

    CKP, you really need to research things you comment on. There are a massive amount of new uses for silver and more being uncovered all the time, think solar panels and a multitude of medical uses just to get you started. As for the 20% vat, a lot of countries don`t impose this theft including the USA. There is a major amount of scope for silver to rise substantially,and if as I think the price doubles, trebles or more from here, are really going to worry about the original 20% VAT !!

  4. 13/03/2014, CKP wrote

    Yes it does have a number of industrial uses but global consumption has only increased by around 15% since 2000 as the decline in film photography has largely offset increased use in pv, electronics and catalysts. If the price were to rise significantly, industries would be able to substitute, increase recycling and reduce their use of silver reducing the demand. It should be viewed as an industrial metal rather than a precious one. Central banks no longer hold reserves of silver, I’m not aware of any society that uses it as currency, therefore it is not “money”. The massive price spike in recent years was due to a temporary shortage of very high purity silver required for pv which led to misinformation about supply/demand and resulted in a short lived speculative bubble. The price has since reverted to near it’s real long term average and likely to stay there. There’s a lot of misleading info posted on the internet by silver bugs with vested interests – bulllion dealers and the like.

  5. 15/03/2014, dialucrii wrote

    @ CKP

    I find it astounding just how confidently people can speak on a subject with what is clearly very limited information.

    The reason the silver price is not rising with the gold price YET, is because JP Morgan still holds a huge short corner in silver (circa 14% or more). If you hold that big a corner in a market you can decide which direction it goes in, period. If you hold a huge (and technically illegal) short corner in a market you do not want it to rise and will do al that you can to prevent that. Now that precious metals manipulation is progressing further towards the mainstream media and public knowledge, it is becoming more difficult for those doing the manipulation to carry on with it to the same extent, given that their activities are now being more closely watched.

    Gold has risen recently in no small part due to the heightened awareness of manipulation and silver will follow suit once JP Morgan have either decreased dramatically their short corner or have accumulated enough physical silver to compensate for it.

    Silver is currently outselling gold 100-1, partly down to increased demand (17% increase to the market) from India. The silver/gold ratio remains much higher than the historic average and therefore you can expect silver to outperform gold during what is now close to being an official bull market in gold (up 18% this year).

    Demand for silver is much higher than the price would suggest and, just as the gold price is just beginning to do now, the silver price will rise strongly this year to reflect that and more importantly the fact that the current price is a product of manipulation to the downside rather than price discovery.

    CKP, I strongly suggest you read a few books (Dimitri Speck – The gold cartel, Jim Rickards – Currency Wars) and avail yourself of the endless amount of information available online. When you have exposed yourself to abroad range of opinion beyond Goldman Sachs saying “Gold is a slam dunk sell for 2014″ and have decided who and what you believe, perhaps then you can provide us with meaningful opinion on the subject.

  6. 15/03/2014, dialucrii wrote

    But since everyone loves a good prediction (especially when they fall flat on their face), here is mine for the remainder of 2014 …

    The precious metal manipulation issue will continue to find a louder voice in the mainstream media, culminating in official “scandal” status later in the year. The price of gold will rise above $2000 dollars by the end of the year and the price of silver will exceed $50, possibly $60.

    I’m not talking my book – I don’t need you to buy precious metals to boost the price of mine – the worlds central banks will take care of that for me and in the meantime I prefer the price lower so that I can buy more each month.

    It will be interesting to see who is right by the end of the year CKP. I actually hope it is you so that I can continue accumulating real money at discount prices in advance of the inevitable global economic reset that we will see over the next few years.

  7. 19/03/2014, Howie Gibbons wrote

    As I am retired with lots of time on my hands I tend to do a bit of scouring the auction houses with a keen interest in silver items of any age for the simple reason that it is often sold at prices well below the melt value even after the commission is added. If this was not reason enough if the item has continental or eastern marks and has been personalised it is even cheaper, I once bought an Indian presentation salver that weighed over three kilos for £140 including charges that I sold for a very nice profit. So you can get something that has beauty as well as intrinsic value, and given the current world situation something that might also be one of your few remaining appreciating assets, which when you tire of you can sell to a scrap precious metal outlet by post for a very quick turnaround.

    Many people are put off physical silver because unlike gold it incurs VAT, however there is no guarantee that this remains the status quo. It is not an impossibility that the EU might decide to impose VAT on gold at some point, which might then make silver even more attractive.

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