Mining for Investments: Silver Is a Golden Opportunity

Source: Thinkstock

Source: Thinkstock

Yes, silver has dropped over 60 percent in value since its (overdone) run up in 2011. But I am of the opinion that silver has now bottomed. We have a solid line of support in the $17.75 to $18.25 area and have only breached this area very briefly. We have consistently bounced off of these levels. As of the time of this writing, silver trades at $19.60. I think now is the time to start acquiring a position. There are several sources of demand.

It should be obvious, but there will always be demand for silver because aside from silver being a precious metal, it also has many industrial and technological applications. Therefore, there will always be some level of demand, but such demand should pick up significantly when the global economy comes fully out of recession. Despite the stock markets in the U.S. setting all time highs, the broader economy is still just limping along. When it 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 – silver even has antibacterial properties – and most recently in nanotechnology. The biggest growth area for silver use, besides being a precious metal currency, is in technology, and that is where a lot of demand will be generated as we further delve into an era dominated by Apple iPhones, iPads, and its competitors’ similar products. Apple alone has created massive industrial demand for silver.

Silver is utilized heavily in these high-tech devices. On average, 13 cents of silver is now used in each cell phone as when silver was about $9 an ounce, 6 cents of silver was utilized per phone. While that is not much for a single phone — considering there were nearly six billion mobile subscribers worldwide in 2012-2013, a number that’s growing here in 2014 — it becomes clear that new phones will always be in demand. 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. With all of these sources of demand and a dwindling supply, I think an investment in silver is a golden opportunity.

There are three ways investors can get exposure to silver and I recommend them all as buys right now at current prices. My top approach for silver exposure is purchasing physical silver bullion and coins, followed by purchasing shares of ETFs that track silver prices, and finally through the stock of the individual silver companies/miners.

Source: Thinkstock

Source: Thinkstock

Physical bullion or coins: This is the best way to invest in silver in my opinion. I encourage people to carry away as much as they can from local dealers while silver prices remain depressed at current levels. There are numerous dealers in most cities and on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver as a wise investment given potential government stimulus, but I also consider it to be a form of insurance in case of a total meltdown of the fiat currencies and modern financial systems we have in the world today. If you decide to invest in physical silver assets, do so only from a reputable dealer. This is especially important if you’re purchasing over the Internet where you will want to look for a well-established dealer with a long history and stability in the business. The only downside from 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 fees.

Silver ETFs: One option for those who do not feel comfortable with purchasing physical silver is through an ETF. The iShares silver trust (NYSEARCA:SLV) is a popular investment that seeks “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, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.” The fund has $6.3 billion in assets with an annual expense ratio of approximately 0.7 percent. Shares in SLV currently trade at $18.85 and have a 52 week range of $17.75-$23.84.

Stocks: Finally, there are the silver companies/miners to consider for exposure to silver. The best way to gain exposure to silver miners as a whole is through the silver mining ETF. For those willing to take on more risk and do the necessary homework, an individual silver company or miner could be considered in place of the silver miner ETF potentially offering better returns. A few of my favorite silver companies are:

Silver Wheaton (NYSE:SLW): Silver Wheaton operates as a worldwide silver streaming company. Silver streaming is basically a process by which the company purchases a mining firm’s silver production in order to distribute that silver in the market. SLW has contracts to purchase silver in bulk at prices well below market value and then proceeds to sell the silver at a higher prices. The company has “multiple long-term silver purchase agreements and two long-term precious metal purchase agreements whereby it acquires silver and gold production from companies located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal.” SLW currently trades at $22.55 and has a 52 week trading range of $17.75-$29.17. On average, about 3.4 million shares exchange hands daily. The company trades at a 25 multiple but only a 1.2 PEG ratio and currently yields 1.2 percent.

Pan American Silver Corp (NASDAQ:PAAS): Pan American Silver Corp explores, develops, and “operates silver producing properties and assets. The company engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico.” It currently trades at $13.40 a share with a 52 week range of $9.78 to $15.63. It trades at a negative price-to-earnings multiple given it had been losing money, but does sport a 3.6 percent yield annually.

Central Fund of Canada Limited (NYSEMKT:CEF): Central Fund of Canada Limited is a closed-ended commodity mutual fund launched and managed by Central Group Alberta, Ltd. It “invests in the precious metals commodity markets. The fund primarily invests in silver and gold. The company provides an alternative for investors in holding marketable silver related investments. It invests its assets in holdings of unencumbered, allocated and segregated silver bullion and holds its assets in international bar form. CEF’s nominal holdings of bullion certificates are deposited with Canadian Imperial Bank of Commerce.” Shares of the company currently trade at $13.72 with a 52 week range of $12.19 to $16.69.

Bottom line: Precious metals stand to gain significantly from balance sheet expansion at central banks and eventual inflation. While gold is certainly an excellent play off of the possible stimulus, I believe silver and silver companies may outperform gold in the next few years. There is a dwindling supply of silver and a growing demand, particularly from technology. While this list is not exhaustive, it represents my preferred ways to gain exposure to silver. At current levels, I believe silver and silver companies are a strong buy.

Disclosure: Christopher F Davis is long silver bullion and owns shares of Silver Wheaton.

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