The best way to bet on silver

published 14 August 2012

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.

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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.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.