Here’s Why It Might Be the Right Time to Buy Silver

Source: http://www.flickr.com/photos/sirqitous/

Source: http://www.flickr.com/photos/sirqitous/

Silver is indeed a gentleman’s currency. However, it has been two years of downside pressure for investors in silver, but I have recommended accumulating it heavily once it dipped under $23 an ounce and almost took to the streets to encourage buying at $18 an ounce. I have been buying silver at a strong clip. Prices have now come back and stabilized around $21 and it is likely just the beginning. Inflation is slowly — very slowly — starting to creep up in corners of the world, and that is a nice source of upward pressure for the metal. Still, we are a long way from $50 per ounce. Is now a good time to buy silver? There are key supply and demand issues that you need to be aware of and several ways to play the metal.

Let me be very frank with you. The demand for silver is strong. I have mentioned before in prior work that last year we saw a shortage of both American Silver Eagles from the U.S. Mint as well as junk silver available (that is, pre-1965 U.S. dimes, quarters, and half dollars.) This year, there isn’t a shortage, but there is steady high demand. In addition, silver ETFs continue buying silver coins and bullion at a record pace. Thus, demand for the metal is there, and has helped keep silver above the $20.00 mark.

We should also face facts. Despite the stock markets in the U.S. setting new highs, the broader economy is still just limping along. Our GDP is barely showing expansion and may reflect some contraction. Further, the jobs picture seems to look better, but much of this is from reporting wizardry. The fact is less people are working full-time, more are working part-time, and millions have simply given up looking for work. Yet those who cook the books report unemployment has come down, albeit slowly. Take this with a grain of salt. We have had industrial demand for silver, but much of the demand for silver comes from the Fed, which bolsters the precious metal side of the metal.

When the economy rebounds, there will be a spike in demand in many areas. The demand will not be just in coin and bullion form, but also in jewelry, silverware, and dentistry. On the technology front, silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools, and most recently in nanotechnology. One lesser known growth area for silver use is in technology, and that is where a lot of demand will be generated as we further delve into an era dominated by Apple (NASDAQ:AAPL) iPhones, iPads, and its competitors’ similar products. Apple with its millions of iPhones sold has created massive industrial demand for silver. As its sales are strong, this demand will continue. It is clear that new phones will always be in demand.

There is also demand for over $1 billion worth of silver in just new mobile devices alone. There is a lot of silver in old cell phones, photography chemicals or medical devices that already have been taken out of the market. Although there is a push to recycle electronics and reclaim costly elements like silver within them, in situations where silver is used in very small portions (such as new smartphones), it is not cost-effective or even practical to recover the silver. Thus, new silver will be utilized in these devices and Apple is a huge source of silver demand.

At the time of this writing, silver is priced around $21.00 an ounce, approximately 65 percent off its all time highs set in April of 2011. Gold is currently priced at about $1,310 an ounce. That represents a 62.4 to 1 gold-to-silver price ratio, whereas the historical ratio is 16 to 1. The respective prices of gold and silver have not approached this historical ratio in many years, and I believe a reversion is long overdue. How would we get back here? Well, to achieve this reversion, gold would have to fall almost $1,000 an ounce or silver will have to rise at a greater rate than gold in value in the coming years. I believe the latter is far more likely than the former. While the ratio has crept up year-to-date, it has generally been in the 50-54 range for some time. I think it is more than reasonable to expect a reversion to these levels.

Precious metal demand is strong as is industrial demand. In fact, megatons of silver are consumed in industrial processes and further, while sometimes recyclable, silver is often discarded into landfills — never to be recovered. This is the result of silver having been intentionally underpriced for many decades, because it is not worth the labor prices to recover used silver. Industrial processes have been intentionally designed not to consume gold (and silver is a better conductor), and at the high prices gold has commanded for decades, it is nearly all recycled.

However, for the last 40 years silver has been consumed in a variety of vital modern applications at a phenomenal rate. Today, known stocks of silver have shrunk over 96 percent to maybe a half a billion ounces. The nine and a half billion ounce draw down in total silver inventory, was the result of the persistent shortfall between supply and demand, which continues to this day. Not coincidentally, the current 200 million-ounce annual deficit in silver mirrors the long-term trend line average. This continuing deficit is remarkable in that there has been decent growth in world production of silver over the past 50 years, but obviously not enough to satisfy the surge in industrial demand.

I wholeheartedly believe that this argument is correct. You see, demand for silver is unprecedented. In smartphones alone, over $1 billion worth of silver is utilized annually. Add a few extra billion dollars for all of the computers, tablets, and televisions sold each year. It really adds up. Its too cost inefficient to recycle in most cases. This is just in technology alone. Now think about all of the other industries using silver (jewelry, dentistry, nanotechnology, etc.) It is in finite supply with ever increasing demand. Eventually, this needs to normalize, and when it does, silver prices stand to benefit tremendously. Silver is very attractively priced. How do we play it?

In my opinion, the best way to invest in silver is through physical bullion or coins. This is primarily how I personally invest in the space, though I have utilized some of the paper approaches I will discuss below. There are dealers in most cities and merchants on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver as a wise investment given government stimulus, but I also consider it to be a form of insurance in case of a total breakdown of the fiat currencies and modern financial systems we have in the world today. If you choose to invest in physical silver assets, do so by only buying from a reputable dealer. The only downside of Internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid such excessive shipping and handling fees.

One option every silver bull should consider for paper profits, especially those who do not feel comfortable purchasing physical silver, is through buying units of an ETF.

The iShares Silver Trust (NYSEARCA:SLV): This is a popular investment that tries to reflect the price of silver owned by the Trust, less the Trust’s expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, it provides investors with an alternative that allows a level of participation in the silver market through the securities market. The fund has $6.7 billion in assets with an annual expense ratio of approximately 0.5 percent. Although this fund tracks the price of silver, if silver were to remain stagnant for all of 2014, say at $20 an ounce, then the trust would lose value given the fees and expenses. Overall, it does a good job of tracking silver price moves in general, but this caveat is important to consider for a long-term investment. Shares in the fund currently trade at $20.12 on average volume of 6.2 million shares and have a 52-week range of $17.91-$23.84.

Sprott Physical Silver Trust (NYSE:PSLV): The Sprott Physical Silver Trust is an ETF that is backed entirely by physical silver bullion. The fund’s goal is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical bullion. The Trust offers a number of compelling advantages over traditional exchange-traded bullion funds, including bullion storage in Canada, which is not held with a bank-owned custodian. Further, the fund allows investors to redeem units of the ETF for delivery of an equivalent amount of physical bullion. In this regard, the fund is unique relative to the iShares Silver Trust and other ETFs that track silver. It is perhaps the best way on paper to invest in silver. Currently it trades at $8.45 a share on average daily volume of 1.1 million. The 52-week range of PSLV is $7.36 to $10.02.

For the risky investor, the final option to consider is the silver companies/miners. There are plenty of individual companies that I really like. Overall, I really like Silver Wheaton (NYSE:SLW) and its streaming business model better than other silver miners that actively produce the metals. There are many individual companies to choose from. The best way to gain exposure to silver miners as a whole for those who do not wish to pick just one is through the Global X Silver Miners ETF (NYSEARCA:SIL). The Global X Silver Miners ETF currently trades at $16.15 on average daily volume of 173,000 shares. The Global X Silver Miners ETF has a 52-week range of $10.46 to $16.88. For those willing to take on more risk and do the necessary homework, an individual silver company such as Silver Wheaton or another miner I have recommended in prior articles could be considered in place of the Global X Silver Miners ETF, which potentially could offer better returns. However, Global X Silver Miners ETF will offer exposure to the whole sector.

Disclosure: Christopher F. Davis owns physical silver and a multitude of gold and silver related equities including Silver Wheaton and the Global X Silver Miners ETF.

More From Wall St. Cheat Sheet: