Forecasting prices for anything can be tricky. And a precious-metal commodity such as silver is no exception.
With gold holding the leash on its “lapdog” – silver – the performance of the so-called “yellow metal” holds the key to silver prices in the New Year.
Here’s why: For several years leading up to the 2008 stock-market panic, it typically took 55 ounces of silver to buy an ounce of gold. Today, a gold ounce will cost you 50 ounces of silver.
The message: There’s been a fundamental shift, where precious metals investors see silver as the “more-affordable” true-money option. So, I expect this newer 50:1 ratio to hold, and perhaps to even decline – which portends a relative outperformance for silver versus gold.
And that brings me back to my price prediction. If we use the current 50:1 ratio – and my expectation that gold will be trading at $1,900 an ounce by the end of 2011 – I believe we’re looking at a target price for silver of $38 an ounce.
That represents a 33% return over the approximate price of $28.50 an ounce at which silver was trading at midday yesterday (Wednesday).
That’s a target I believe to be very realistic, given the times.
How to Buy Silver – the “Other” Precious Metal
As a longtime observer of the mining, commodities and precious-metals markets, I’ll be the first to admit that – as precious metals go – silver may not have quite the same mystique as gold.
But let’s be honest: The “white metal” has its backers, too.
In fact, when Money Morning published its “How to Buy Gold” special report recently, one of the biggest questions that we received in response was: “When can you do the same for silver?”
When we published a full report on silver back on Sept. 1 – and recommended it as a “Buy” – the “white metal” was trading at about $19 an ounce. Readers who took our advice have reaped a 50% return in three months.
Although gold possesses the greatest allure of precious metals, silver has a longstanding tradition in many cultures – a tradition that in some cases reaches back thousands of years.
Here in the United States, silver alloys were still present in some of our everyday coins as recently as 40 years ago. Today, however, silver is no longer viewed that much as a monetary metal. But that’s because about 40% of silver is used for industrial applications.
The physical silver market is small, with annual demand of slightly less than 900 million ounces.
Silver prices are volatile – on the upside and the downside. After hitting a bull cycle high of nearly $21 in early 2008, the global financial crisis tipped silver prices into a near-freefall: They declined by more than 50% to drop into the $9 range later that year.
Since that financial-crisis nadir, silver prices have soared and have eclipsed that 2008 high.
An important metric to understand and watch is the silver-to-gold ratio. It tells you how many ounces of silver it takes to buy one ounce of gold. Historically, that ratio is 16 to 1. On this basis alone – with gold sitting at nearly $1,389 an ounce at midday yesterday – silver should be at $86.75.
That’s a long way from the current price of $28.50.
Popular Forms of Silver
Like gold, silver investments can be made in a variety of forms. Let’s take a look at some of the most popular.
Physical silver can be purchased in a variety of sizes and weights, which determines its price. Most typical are 1.0 ounce silver coins, like the Austrian Silver Philharmonic, the American Silver Eagle, and the Canadian Silver Maple. Their prices vary slightly due to differences in silver purity, with the Silver Maple being the highest at 99.99% pure. You’ll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.
Another popular option is the 100-ounce silver bar, which commands a 5% premium over the spot price of silver, meaning the bar is currently selling for slightly more than $1,900. These coins and bars are essentially bought for their silver content and not as collectibles. If you’re looking to build a silver stash – either large or small – bullion dealers may be the easiest way for investors to do so. But do your homework first, and check them out before you buy. Also, avoid paying more than the premiums I noted above for either coins or bars.
Some investors wonder if they should buy smaller denominations, like 1/20th, 1/10th, ¼, or ½ ounce (gold) coins. The thinking goes like this: If ever these coins need to be used to transact and make payments, one would want to have smaller “amounts” to carry around. That’s a valid rationale. Even so, keep in mind that you’ll pay a premium to the actual silver content, since each individual coin has to be fabricated. I believe that, should we ever get to that point, you could just convert a one-ounce coin or bar into a number of smaller coins, and pay the premium, or perhaps receive whatever else is being used for transactions (a new currency?) in return.
A few dealers that have an established reputation are:
- Kitco.com: Premiums are fair and the selection is usually quite good. They have offices in both New York and Montreal.
- Asset Strategies International Inc: This dealer is located in Rockville, MD. Asset Strategies also offers gold storage options outside U.S. borders.
- Camino Coin LLC (caminocompany.com): Burlingame, CA.
- American Precious Metals Exchange (apmex.com): Oklahoma City, OK.
- The Tulving Co. (tulving.com): Newport Beach, CA
- Gainesville Coins (gainesvillecoins.com): Lutz, FL.
Exhange-Traded Funds ((ETFs)) and Certificates
Another option for silver ownership is through exchange-traded funds (ETFs) or certificates. As I mentioned in the “How to Buy Gold” special report, ETFs are a convenient way to establish a claim on gold, and the same applies to silver. A simple way to acquire a claim on silver is to buy units of the iShares Silver Trust ETF (SLV).
With some $5.5 billion in assets, SLV is the world’s largest silver-backed ETF, using JPMorgan Chase & Co. (JPM) in London as its custodian. SLV shares, which represent approximately 1.0 silver ounce each, are easy to buy and sell through your brokerage account.
You can also acquire “paper silver” through Perth Mint Certificates (PMC). Vault-protected and insured, PMC offers the only government-backed bullion storage program on an allocated or unallocated basis [this means stored separately for you (allocated), or stored along with everyone else's (unallocated)].
In an “allocated” situation, your coins or bars are removed from the mint’s operating inventory, and placed in the Perth Mint Depository vault with your own account number. Allocated metals are not part of the mint’s balance sheet, so you will pay storage fees. The government of the state of Western Australia guarantees the certificate.
Minimums are USD $10,000 for your initial PMC purchase, with subsequent purchases at the USD $5,000 minimum level. If you hold your coins, bars, and bullion on an unallocated basis, they can be converted into specific coins or bars and you can then take delivery, if you wish. The Perth Mint Certificate program is a solid way to gain international diversification for your silver holdings. For more information, check out Perthmint.com (note that Kitco and Asset Strategies also offer PMCs).
(The Perth Mint was established in 1899 when Britain’s Royal Mint built a series of branch mints. These branches were set up in places throughout the British Empire where gold was found, eliminating the need to ship gold back to England to fabricate coins that would then have to be distributed back through the Empire.)
As I noted in my “How to Buy Gold” article, “paper” gold is not the same as “physical” gold. This contrast holds true for silver, as well. Despite the Western Australia government backing and long history, you have to realize that with PMCs you’re still relying on someone else’s promise. By contrast, with physical silver under your control, you’ve eliminated any counterparty risk.
The escalating interest in precious metals brought about by the rapidly accelerating fears about the U.S. economic outlook has brought about a real increase in worries of gold-and-silver confiscation.
Back in 1933, in the depths of the Great Depression, U.S. President Franklin D. Roosevelt signed Executive Order 6102, effectively forbidding the ownership of gold coins, bullion, and certificates by U.S. citizens. This coerced the public to turn in their gold for $20.67 an ounce, which the government shortly thereafter “revalued” to $35 per ounce. What’s especially interesting about EO 6102 is the absence of any mention of silver.
Now we can’t know if there will ever again be anything akin to this Oval Office edict – much less what it might cover and might say. But going on the past, and considering the size of the silver market relative to gold, silver may be a way to own a precious metal that just might sidestep any risk of future confiscation.
However, if the government getting its hands on your hard-earned silver is a personal concern, then you may want to consider a particular kind of silver investment. One option may be to own silver that’s held outside of your country of residence.
As I mentioned in the “How to Buy Gold” article, one example of this for U.S. residents would be the Central Fund of Canada Ltd. (CEF). It’s a closed-end fund that owns physical gold and silver, and that’s been around since 1961. It’s domiciled in Canada, with its precious metals stored in the vaults of a Canadian-chartered bank. CEF often trades above its net asset value (NAV), but you should avoid paying more than a 5% premium. See www.centralfund.com for more information.
But my favorite “silver-only” fund is the ETFS Physical Silver Shares (SIVR). Issuer ETF Securities Ltd. is one of the largest ETF providers in Europe, with some $16 billion under management. Each unit is about the equivalent of 1.0 ounces of silver in U.S. dollars. As well, it seems to trade with a net asset value that boasts almost no premium or discount, and management fees are reasonably low, around 0.30% annually. The company indicates that the physical silver that backs the units is held in a vault in London.
As I’ve said before, there’s no substitute for having some physical precious metals stored under your own direct control. And even the SIVR silver ETF shares are a paper claim on silver. But it does add another dimension to your precious-metals holdings, and accomplishes that with storage in another jurisdiction.
Profiting From Junk
Despite its name, “junk silver” is not junk.
Indeed, the term “junk silver” is actually a misnomer, since this form of silver investing has provided excellent returns over the past decade. Junk silver consists of U.S. quarters, dimes, and half-dollars minted before 1965, since coins struck before that time contain 90% silver and 10% copper.
But junk silver’s real attraction is that it offers investors the best of both the two possible investing extremes that seem to be attainable right now:
- First and foremost, during intense bull markets in silver – like the one we’re experiencing right now – junk silver tends to outshine (and outperform) silver bullion.
- But if some of investors’ darkest fears are realized, and the U.S. government’s overenthusiastic printing of money were to transform the greenback into so much worthless paper, then 90% of U.S. silver coins would be used for the purpose they were originally minted – as money that can be spent.
The term junk silver was adopted because the coins being referenced typically have no collectible value. Instead, junk-silver coins are valued for the bullion value of the silver that they contain. Here in the United States, the most commonly collected junk-silver coins are the Mercury and Roosevelt dimes, Washington quarters, and the Franklin and Kennedy half dollars that were minted in or before 1964. That’s because these coins have a 90% silver composition that’s known as “coin silver.”
There are six solid reasons to make junk silver part of your portfolio. In short, junk silver:
- Is a finite commodity.
- Is no longer being produced (the scarcity factor).
- Is a product (currency coins) that is easily recognizable.
- Is divisible, meaning you’re able to use small amounts to pay for something.
- Requires no assaying.
- Was produced by the U.S. government, meaning everyone recognizes what you’ve got, so you don’t need to run any tests to prove its value.
- And is utilitarian, meaning you could actually put change into a payphone (remember those?) or a vending machine to purchase a product or service.
Kevin Drost, preferred client relations manager at Asset Strategies International Inc., says many of his company’s clients feel there’s a seventh reason to own junk silver that’s no less important than the afore-mentioned six: Since it was produced by the government itself – and is “legal tender” – it can’t be confiscated.
The Mathematics of Junk Silver
Junk silver is sold in bags of either $100 face value or $1,000 face value. Typically, the $100 face value bags contain 1,000 dimes, or 400 quarters, or 200 half-dollars (the coin denominations are usually not mixed).
Since these coins were in circulation for decades, wear and tear means they no longer contain 90% silver. In fact, they typically contain about 71.5 ounces of silver. So at recent prices of roughly $20 an ounce, $100 face value bags run about $1,530, which includes a 7% premium to the spot price of silver (On the smaller bags, that’s the average premium you should expect to pay. The $1,000 face value bags, of course, contain 10 times the number of coins as the $100 face value bags, with a small pricing advantage of 5% premium over spot silver prices).
For more information on junk silver, check out the full report that we did for beginning investors back in late September.
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