Silver: It’s not too late

Thursday, April 6th, 2006

Silver, more affordable than gold, more alluring than copper or zinc, is on an undeniable tear. After a recent run that’s seen the spot market for silver soar from a low of $6.74 per ounce to $12.03 at yesterday’s close, everyday investors have to be wondering if the precious metal is near the end of its luster. After all, the smart investors got into silver long before it began hitting new 20-year highs.

The current silver spike began in earnest last year as Barclay’s Global Capital moved to petition the Securities and Exchange Commission for the first electronically traded silver fund, or EFT. The move came quick on the heels of the successful launch of the first two gold EFTs on the AMEX, Barclay’s iShares COMEX Gold Trust (IAU) and World Gold Trust’s streetTRACKS Gold Shares (GLD), both of which hold huge sums of gold in vaults (see the StreetTracks hoard above right) and peg shares to 1/10 oz. spot prices. Barclay’s silver EFT, expected to win approval later this year, will reportedly sell shares representing about 10 oz. of silver. With initial interest strong and EFTs representing the primary commodity vehicle for the everyday investor, Barclay’s is seen buying up enough bullion to crimp the global silver market – hence the run-up.

Silver is trading at double the range of $4 to $6 its sat at since 1980 when the billionaire Hunt brothers pushed spot prices to $50 an ounce and brought on a spectacular crash.

Room to grow

Despite its volatility and recent gains, though, I’m inclined to support silver in both the near and long term.

The metal’s current trading value is far below its pre-crash historic price ratio of 15 to 20 ounces of silver to one ounce of gold. At today’s prices, it takes 50 ounces of silver to buy one ounce of gold, a valuation that has little connection to the relative scarcity of the popular metals.

As a caveat, careful investors should mind what happens when too much pressure comes to bear on the metals markets: pushback from central banks inflation fears and increased exploitation activity that can drive down prices. The looming EFT, however, isn’t the only thing going for silver. Foreign investors are increasingly stocking up on metals, and China is seen leveraging more bullion to diversify its foreign debt. That could mean sluggish days for U.S. treasuries and a long, sustained run for silver and other precious metals.

Additionally, the jewelry market will continue to be a major silver buyer, keeping demand strong regardless of increased production.

I’m favoring silver over the more pricey gold, platinum and palladium for a number of reasons. Besides its attractive ratio at today’s prices, I also like that it is still priced attractively for the small investor (although shares in the EFT may end up costing more than gold shares). Doomsday investors like to point out that an ounce of silver, especially in one of its official currency forms such as the U.S. eagle, could easily function as currency in the face of global currency meltdown. Just don’t let all that silver under your mattress ruin your sleep.

Getting in on the action

With Barclay’s pending silver EFT poised to bring everyday investors into the silver-buying fold with the big boys, what can you do now to get in before the gains level off? Though it is not quite as easy as just clicking a few buttons on your online brokerage account, there are plenty of do-it-yourself ways to buy silver today without paying large commissions.

Physical silver is generally sold in denominations of one, 10 and 100 ounces and can be purchased from any large online coin dealer (and probably the one down the street in some fashion) and on eBay. The most attractive silver coins include the one-ounce U.S. eagles and Chinese pandas, which trade at modest markups from spot. You can also purchase signature coins and bars manufactures by large mines. In the bar form, common mints include Englehard and Sunshine. In the 10 oz. weight, the most attractive bar is from the Wall Street Mint and features the pre-9/11 New York skyline. Expect to pay about 5 percent above spot for generic bullion unless you’re buying a large quantity of silver.

An even simpler pre-EFT option is shares in the Central Fund of Canada, a gold and silver trust that trades on the AMEX under the symbol CEF. The Central Fund is currently trading below $10 a share and at a premium of about 10 percent above its assets’ spot value. The fund holds 619,591 ounces of gold and nearly 31 million ounces of silver.

On the tax-favored front, the American Church Trust, for a modest opening cost and annual management fee, has IRS approval to sell silver bullion for IRA investors. The boldest everyday investor might also want to sink a few hundred dollars into a speculative mining stock or a larger sum into a few of the more established mines (but that’s another column).

The Challenge: Responsible Gold and Silver Mining

With gold and silver taking off and more investors moving to these age-old hard assets, it’s a real challenge to find mining stocks or metals that meet minimum standards of environmental responsibility. Here’s an article on a pilot project for certified “Green Gold.” Jewelers are in the forefront of commercial support for environmentally sound mining practices; bullion investors should join the push. …