Why you should stock up on silver

Silver looks like a serious investment proposition, says Jack Dyson. It has multiple applications, is highly versatile, yet looks distinctly undervalued.

What's so special about silver? The most plentiful and least expensive of the precious metals, silver has been used in jewellery and as hard currency for centuries. From ancient Greece and Rome to the old silver dime in the US, a silver coin has historically been the equivalent of a day's wages. For five hundred years until the mid-19th century, it took between 15 and 20 ounces of silver to buy one ounce of gold. Now that ratio is 58:1. With that sort of benchmark in mind, some analysts argue that silver is distinctly undervalued. Silver has some heavyweight fans too. Warren Buffet bought 130 million ounces of real silver in 1997 - as much as he was legally allowed to buy - and has since been joined in the market by George Soros (who owns a large percentage of Apex Silver) and Bill Gates (who is said to own more than 10% of Pan American Silver).

Why invest in silver?

Supply and demand: every year we are using more silver than we mine. Demand has outstripped mined supply for the past decade, with an average annual deficit of 133 million ounces. Silver bulls say that makes investing in silver a no-brainer: if the dollar continues to fall and the financial markets suffer, both silver and gold will rise as investors make the flight into quality. Equally, if the global economy flourishes and China continues its aggressive growth, then more silver will be needed, and the price will rise.

How has the price of silver performed?

As well as being known as "poor man's gold" and "the white metal", silver is sometimes called "the restless metal", because of its volatility. It is a small and thinly traded market, and hence prone to dramatic movements. Last April, having risen sharply over several months to $8.29 an ounce, it plummeted 32% in a month. At the end of 2004, it slid 17% in seven days from $8 to $6.50, and has since risen back to $7.37. Over the long-term, though, the trend is up.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Isn't the silver market easily manipulated?

For the past few years, allegations that the silver price is being artificially held back have been picking up steam. According to the price-fixing argument, the reason for the oddly low price is that a cartel of silver managers has artificially increased supply, by buying the metal from central banks such as China's, in order to depress the price. There is further conjecture that for the past 20 years a group of commercial traders have held short futures positions so large that they cannot serve legitimate hedging purposes, because they can't be backed by real silver. This has created perfect conditions for a mammoth price spike, because stocks are now so low that the short positions are rapidly becoming untenable.

Are these rumours true?

Last May, Michael Gorham, then the director of the US Commodity Futures Trading Commission, published an open letter aimed at reassuring silver investors. He said that while there was a production deficit, there was as yet no supply deficit, though supply was certainly falling. According to Gorham, the allegations of manipulation are the result of a sinister spin being put on perfectly normal hedging strategies, where the total open-futures contracts holdings often exceed the ability of traders to make actual physical delivery against them.

So how do I invest in silver?

The low price means that direct physical ownership is a viable option. It's relatively easy simply to buy silver and store it as bullion, or in bags of scrap silver. In the UK, however, silver bullion bars and coins are subject to VAT, so few traders stock them, though 24carat.co.uk can get silver bars on a plus-VAT basis. Futures, or spread bets, are probably the simplest way of actively trading the metal, but you can end up taking big losses from comparatively small movements in price.

What about stocks?

If you want to buy silver stocks now, you could invest in US silver miners such as Pan American Silver, Hecla Mining and Silver Standard. However, fully to take advantage while silver is still a contrarian play, Doug Casey in International Speculator recommends that investors consider Toronto-traded Silver Wheaton (SLW). Originally CEO of Wheaton Gold, the company's boss, Ian Tefler, has a terrific track record and a sound strategy; Silver Wheaton is quite simply "a brilliant piece of financial engineering", says Casey.