NEXT BELL OF THE BALL ? / BARRON´S MAGAZINE ( VERY HIGHLY RECOMMENDED READING )

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SATURDAY, JULY 24, 2010

Next Belle of the Ball?

by ROBIN GOLDWYN BLUMENTHAL

Silver has long been a wallflower, overshadowed by glamorous gold. But its turn in the limelight is coming. Three ways to play the metal.


SILVER HAS ALWAYS STOOD in the shadow of its more glamorous sister, gold. But these days, silver looks like the Cinderella metal. And its night at the ball could be coming soon.

The white metal, which has many industrial uses, may see some near-term price pressure because of concerns about global economic growth. But some bulls think that, over the long term, it will best gold, which has far outpaced it over the past decade.

Silver, trading around $18 an ounce, is "really, really depressed on a historic basis," says Jim Rogers, a commodity investor and former Barron's Investment Roundtable member. He notes that silver is 70% below its all-time high above $50 an ounce, hit in 1980 when the Hunt Brothers cornered the market.

The metal has risen 30% in the past year, but it is still well below its near-term high of $21 an ounce, set in 2008. Gold, at its recent price of $1,195, has been trading at 66 times silver, versus the 10-year average of 62 times and the longer-term ratio of just 16 times.

Thomas Northcut/Getty Images

Shadowing Silver: Silver Wheaton stock and the iShares silver ETF have closely tracked the metal's price.

"IF YOU'RE A REVERSION-TO-THE-MEAN player, it would imply that silver will outperform gold," says Mark Johnson, co-manager of the USAA Precious Metals and Minerals Fund, whose 27.25% return makes it the top performer in its category over five years, according to Morningstar.

Says James Turk, founder and chairman of Goldmoney.com, which sells and stores precious metals: "The volatility's not for everybody, but if you're a long-term bull on precious metals, I believe the ratio will go back below 20." At 20-to-1, silver would fetch almost $60 an ounce, assuming that gold's price didn't change.

What could boost silver's price? Certainly, worries about sovereign debt and banking instability would contribute. Like gold, silver has been viewed as a store of value for thousands of years.

On the industrial front, silver has a very wide variety of applications, particularly in green technologies such as solar energy and water purification. It's also used as an antimicrobial to fight bacteria in everything from food to pacemakers. Robert Quartermain of Vancouver, a precious-metals investor, says industrial uses could give it an extra bump as the world economy picks up.

"There is more disposable income on a global basis with people looking to invest," and precious metals will likely be one asset group that savers, such as the Chinese, will target. Moreover, unlike gold, in which central banks hold a sizable position and can cap price increases by selling into the market, the only identifiable supplies of silver are with exchange-traded funds and metals exchanges like the Comex, Quartermain says. With only 889 million ounces produced last year, "if there's some escalation in price, there's nothing there to slow it down," he says.

Shadowing Silver

Silver Wheaton stock and the iShares silver ETF have closely tracked the metal's price.
Thomas Northcut/Getty Images ..


There are basically three ways to bet on silver: owning the physical metal, buying an ETF backed by it and—the riskiest—investing in a silver stock.

Goldmoney.com's Turk recommends creating a portfolio of two-thirds gold, one-third silver. That can be done through services such his or Gold Bullion International. Each has an independent auditor and third-party storage. Another route: acquiring U.S. Silver Eagles or other coins, although you'd have to store it yourself.

If you prefer an ETF, two worth a look are the iShares Silver Trust (ticker: SLV) and the Global X Silver Miners (SIL). They essentially track the price of silver and have low expense ratios. New ETFs arrive frequently; investors should closely examine prospectuses and check who's the custodian and where the metal is stored.

AS FOR SILVER EQUITIES, THEY provide "an option on the stuff yet to be produced," says John Doody, editor of the Gold Stock Analyst. He counts Silver Wheaton (SLW), which helps finance mining concerns, as one of his favorites. Recently changing hands at $18.83, it is one of his best performers. In fact, it's the sole silver issue among his top 10 precious-metal picks.

Doody recently raised his price target on SLW to $33, based on an expected silver price of $18 in 2013. Silver Wheaton, a reseller of silver that it has paid $4 an ounce for, is projected to have 40 million ounces of production in 2013. An additional attraction: It's considering paying a dividend, Doody says.

Another operator is Pan American Silver (PAAS). Though it doesn't have a lot of growth over the next two years, Andrew Kaip, who follows silver miners at BMO Capital Markets, notes that it trades at a price to net present value of assets of 1.3 times, well below the peer average of 1.7. And, he adds, it has made important acquisitions that could give it "a very significant" growth profile after 2012.

But regardless of how you play it, silver should sparkle for years.

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