There is a grand conspiracy around the price of silver. It concerns a mysterious cartel of traders who have made it their business to manipulate the price to keep it as cheap as possible. Some say industrial consumers of silver, who need cheap silver to produce cameras, mobile phones and medical equipment, are behind the cartel. But what many analysts agree is that these traders are about to be exposed.
With a global supply crunch on the way, the four or five traders who hold some 35% of all silver contracts on the New York Commodities Exchange will soon be called on to come up with tonnes of silver that they don't have. And when that happens, the price of silver will geyser from $16 to $100 an ounce.
But the truth as so often is more complicated than that. Others involved in the silver market argue that there's no vast shortage of silver as such and that this cartel of traders is not acting alone. Economist Antal Fekete says, for example, that there are hordes of silver across the world governments, bullion banks and multi-millionaires have been hoarding the metal for years, and making a tidy profit from their holdings.
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The argument goes like this. Let's say China has a massive stockpile of silver sitting in its bank vaults. Instead of simply sitting on it, the Chinese can go to an investment bank and ask them to manage their reserves so they can earn a little return on their hoard. What the investment bank does is use the silver as collateral to sell a future contract on the silver on the New York Mercantile Exchange which means they have an obligation to sell the silver at a future date while simultaneously buying silver.
The idea is that so long as the price of silver rises steadily, the Chinese earn a nice stream of income on the futures contract. But the trick here is that the whole business is anonymous. The silver reserves don't have to be declared when traded and so nobody knows exactly what's backing the trade.
Whatever the truth, one thing's for certain silver is in demand, both for industry and for investment. Despite its dwindling use in photography, the metal still has myriad industrial uses from being used in solar panels and stethoscopes to wing mirrors and new ones are being discovered all the time. In fact, demand grew by a record 7.2% last year.
But while industrial demand continues to grow, the real reason to buy silver is the same reason you'd buy gold to protect your wealth from inflation. It's not just big players who are holding onto their precious metals. As Tony Baird of bullion dealer Baird & Co told Dominic Frisby in Money Morning: "At the moment we have buyers in precious metals, but very few sellers. In the 1970s people were queuing up to sell their grandmother's cutlery and their grandfather's teeth. But now there are very few."
With China and Middle Eastern governments worrying about their weakening dollar holdings and inflation rearing its head in economies across the world, metals consultancy GFMS reckons silver should average $17 an ounce this year, up from $13 in 2007. Another gold run towards $1,000 will lift the metal to $20 an ounce, says GFMS but you shouldn't rule out a big spike. As Frisby puts it, "silver is a much smaller market than gold", so the price is more volatile. Even if you don't buy the conspiracy theory, you should own silver. See below.
Four ways to invest in silver
You can invest in silver in two ways: buy the metal itself in the form of a coin or bar, or invest indirectly through mining companies or exchange-traded funds. Buying the metal itself can be impractical a 1,000 troy ounce bar weighs 31kg, for example. And while the reserves of mining companies such as Apex Silver Mines (AMEX:SIL) on a forward p/e of ten, and Pan American Silver (Nasdaq:PAAS) on a forward p/e of 13.9, come quite cheaply, the best way to ward off inflation with silver is through an exchange traded fund.
There are two London-listed silver ETFs, both from ETF Securities, which will give you direct exposure to the rising price of silver: (LSE:PHAG) and (LSE:SLVR), both of which can be held in your Sipp or your Isa.
Rather than investing in the silver mining companies, these ETFs offer ownership of the metal itself. The difference between the two is that PHAG follows the spot price of silver, while SLVR tracks the price of silver futures traded on the Commercial Exchange in New York. Both charge an annual fee of 0.49%. With silver trading at a 50-1 ratio against gold, compared to the historical benchmark of 15 times, these ETFs could be dragged some way higher as inflationary fears push gold up and drag silver along with it.
Eoin came to Money Week in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.
Eoin acts as managing editor of MoneyWeek's newsletters.
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