Silver Investing Strategies: The Outlook for the "Other" Precious Metal

[Editor's Note: Silver has soared to its highest price level in more than three decades, a key reason the "other" precious metal is now such a widely held investment. In this special "Silver Investing Strategies" report, we gathered Money Morning's top gurus to talk about their outlook, preferred strategies and favored profit plays. In related stories, we detail a silver-hedging strategy, and ask you for your outlook on gold, silver and other precious metals.]

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Silver rose as high as $41.98 an ounce this week – a 31-year high – and has remained above the $40-an-ounce level. That means that the "other" precious metal is up about 32% so far this year – and has more than doubled since Money Morning recommended it to readers in early September.

But where does it go from here? And how should investors position themselves? To answer those questions – and others – Money Morning brought its top "gurus" together for a roundtable discussion.

For this discussion, Money Morning Executive Editor William Patalon III and Associate Editor Kerri Shannon sat down with Money Morning Chief Investment Strategist Keith Fitz-Gerald, contributing editors Shah Gilani, Martin Hutchinson and Peter Krauth, and Contributing Writer Jack Barnes, the author of our popular weekly "Buy, Sell or Hold" feature.

The consensus: The long-term outlook for silver remains bullish, and a projected near-term pullback might even be healthy. But certain stocks and exchange-traded funds (ETFs) will likely be winners, and certain metals dealers are more reputable than others.

What follows is a transcript of that silver investing strategies roundtable discussion:

Money Morning (Q): Silver hit a 31-year high this week, trading at better than $40 an ounce. It's up 32% so far this year – and has more than doubled since Money Morning recommended it to readers in early September. Do you still like silver, or is its hot streak over?

Keith Fitz-Gerald: It's possible – it's not out of the realm of possibility – that we'll see silver run up as high as $50 an ounce – though not in a straight line, mind you, and not all at once. My expectation is that we're going to see this within the next three to five years.

Investors look at silver as an inflation hedge, but that's really only part of the story. Not only is silver undervalued versus gold, but silver is a hedge with an industrial kicker: Silver is used in thousands of industrial processes, meaning there is real demand.

Q: That's a great point. So many investors fail to realize that more than half of all silver production goes to industrial uses.

Fitz-Gerald: That's right. And here's another potential catalyst that many investors aren't yet aware of: Silver is also in high demand by nation states, as a means of diversifying against an increasingly weak U.S. dollar. Because that's not yet widely understood, there will be an additional "fear factor" that chases prices higher once a news report suggesting that, for example, China has been snapping up ingots.

Finally, silver has become the "common man's" metal – one clever moniker I've seen us use here in Money Morning says that silver is the "poor man's precious metal" – so if you're looking at $1,400-an-ounce gold versus silver at $40, most people are going to go to $40 … because it appears to be a bargain.

Q: Martin, everyone knows about the great gold "call" that you made – telling Money Morning readers to buy the "yellow metal" back when it was trading at $770 an ounce. In fact, you recommended it again at $900. I know you were also bullish on silver. Are you still?

Martin Hutchinson: Yes, I do still like it, but it's had a hell of a run, so I prefer gold right now.

Q: Jack?

Jack Barnes: At the current price levels, I believe silver, like any commodity or equity, can move too far too fast, and that is what I believe we have been seeing lately. I continue to be a long-term bull on silver, but I honestly expect to see prices in the low $30s, before we see prices break $50.

The current move has been parabolic; in my opinion, it's not sustainable … at least not without a pullback, which would actually be very natural and very healthy.

Q: Peter, you were one of the early proponents of silver as a big-potential investment. What's your take, now?

Peter Krauth: It's definitely not too late to buy silver. But let me first qualify that.

Silver rose from $17.50 in August last year, to over $40 recently. That's a 128% gain in just seven months. That's breathtaking.

I recommended to my subscribers to add a silver ETF to their portfolio back in August. They're now up 120% – without any leverage, whatsoever.

If you don't yet own any silver at all, I'd say this: Determine how many dollars you want to allocate to it, then go ahead and buy about 20% [of that position]. Then, if you see it correct by 15% to 20%, go ahead and buy another 50% to 60% of your final intended position.

At that point, keep watching its price. If it dips further, buy the last portion. Otherwise, if starts to rise again, wait for the next dip and then buy the rest. But these are my suggestions. You need to do what you feel most comfortable with.

Some people like to dollar-cost average. In that case, you could split your total up over say 12 equal parts, and just buy the same dollar amount each month for the next year. That way, you'll benefit from any dips along the way.

Shah Gilani: Where does silver go from here? Probably higher. Technically speaking, we're looking at minor overhead resistance points. Even if we get to above $49 (where the Hunt brothers drove silver to in 1980), there's no precedent for where we are and where we could go. If you work off the 16:1 gold/silver ratio that's always talked about, we should already be somewhere around $92. Why aren't we there? Either gold is too high, or silver is underpriced, or the world has changed. Of those three options, I'll go with the latter.


Q: I'm hearing a pretty consistent view here. The long-term view is bullish, and the chances are good that we'll see a near-term pullback. Silver is hovering around $40 an ounce right now – and it reached a 31-year high earlier this week. How high do you see this run going – with the understanding that this "new" high could come after a pullback?

Hutchinson: The 1980 high was $50, which is $130 in today's money. I don't see it going quite that high, but maybe $80, probably within the next 12 months.

Q: Jack, when you recommended silver to Money Morning readers back in September – with silver trading at $19 and change – at about the same time that Peter issued his "Buy" call to readers – you gave us a $50 price target. Do you still feel that way?

Barnes: Again, I am a long-term bull on silver, but I believe that we'll see silver in the low $30s before we see prices break $50.

Q: Peter?

Krauth: I'm on record as saying I expect the price of gold to reach $5,000 an ounce. I also think that the gold-to-silver ratio will drop to 20-to-1 or lower. On that basis alone, $5,000 gold would imply $250-an-ounce silver. I think demand from China will be an important factor driving that price level, as I detailed over a year ago.

I bet some readers thought I was crazy when they saw my forecast for $250 silver. Maybe they still do.

What I'd ask them is this: When it was $4 about 10 years ago, did they think it would rise 10 times to $40? Yet, that's where we are today.

Every call so far – and there have been many – for gold's "bubble" to pop hasn't materialized. I think it will be some time yet before gold and silver eventually peak. I expect that this secular bull run in the precious metals has a long way to go, and I think it will eventually make the tech-stock bull market that peaked in 2000 look like child's play.

Q: Let's talk about some specific silver investing strategies. What investments would you recommend are the best ways to play silver? Keith?

Fitz-Gerald: My personal favorites are the ETFs because they're simple, they're transparent and they're immediately tradable on the U.S. markets. Silver mining companies are probably not bad, but remember they have the same inflationary concerns that other companies do. As inflation takes hold, it costs more money to get the silver out of the ground – general power and energy costs increase, and so do transportation costs. Deal with the stuff that's already above ground and is an easy target.

Q: Peter, because your advisory service is focused on commodities and natural resources, you have a very detailed set of silver investing strategies. What are some of your top picks, right now?

Krauth: Besides owning some physical silver and/or a silver ETF, I like the leverage afforded by the junior and mid-tier silver explorers/miners.

Silvercorp Metals Inc. (NYSE: SVM) produces silver, lead, and zinc within a number of projects in various provinces in China. In April 2009, Silvercorp was trading at $2.08. Recently, it traded above $16.32. That's a 684% gain in two years… now that's leverage!

For reasons associated with silver manipulation (see reader question from David G. below), I prefer to avoid the iShares Silver Trust ETF (NYSE: SLV). Despite being the world's largest silver-backed ETF, they use JPMorgan Chase & Co. (NYSE: JPM) in London as custodian. There are other good options.

I like the Sprott Physical Silver Trust (NYSEArca: PSLV). The silver is stored on a fully allocated basis at the Royal Canadian Mint, which is responsible for the silver in its custody (no financial institutions in the mix). There is even the potential for certain U.S. investors to benefit from a lower capital-gains tax rate. Its management fee is a fair 0.45% annually, but it currently trades at a 15% premium to its net asset value (NAV). That's a bit rich for my taste, and it should be for yours. I recommend that you wait for a more reasonable 6% to 8% premium – at most. Always the innovator, Sprott offers an interesting feature: unit holders have the option, under specific conditions, to redeem units on a monthly basis, in exchange for physical silver bullion.

Hutchinson: I prefer mining companies to silver itself. And within the mining companies, I prefer those that are adding to reserves. Silver Standard Resources Inc. (NASDAQ: SSRI) is interesting, for example. I think the mines' prices have not yet caught up to the metal, which will presumably happen when they report first-quarter earnings in late May.

Q: Jack, regular readers know that you're the current author of Money Morning's popular "Buy, Sell or Hold" feature, which appears every Monday. Back on Oct. 10, you recommended Silver Wheaton Corp. (NYSE: SLW), which had closed at $26.63 on the Friday before. As of this Monday, investors who followed your advice had a 66% gain – in six months, which is 132% annualized. This Canadian company is primarily a silver miner. Do you still like the stock?

Barnes: I still like Silver Wheaton.Its business model has a fixed cost of purchasing silver at about $4 an ounce, or so.The company has built-in capacity increases, due to mines ramping up silver production that it has take-off agreements for.

Silver Wheaton is a safe and secure diversified silver production player.

Q: What should investors watch as a sign to get out of silver? What could bring silver's run to an end? Shah, why don't you start this time?

Gilani: Sure thing. What's driving silver is a combination of speculation based on the theoretical debasement of all paper money; antediluvian psychology that silver as a currency is an absolute store of value; and that China is going to grow itself to the moon and will need steps made from silver to get there.

Yes, markets and economies were flooded with cash, which was necessary to liquefy the world's interconnected financial systems. That can be mopped up. In fact, it's already starting to get mopped up. Hasn't anyone noticed that rates are rising? For heaven's sake the European Central Bank (ECB) has just raised its benchmark rate.

Silver as a currency? Is that practical? Of course not.

Let me put one thing to rest: It's something that bothers me because no one talks about it: Do we think that – for even a moment – we can trust governments to peg paper currencies to silver, or gold for that matter, and not manipulate the prices of hard-money pegs? Gold as a peg, or silver, worked when the world was flat. We've been to outer space; we know the earth isn't flat. Anyone who now thinks that a gold standard is the way back to the future is spaced-out; it's just not practicable in this day and age.

Q: Martin, given some of the things that you've written about inflation recently, this would seem to be a good question for you. What will end silver's run?

Hutchinson: If/when [U.S. Federal Reserve Chairman Ben S.] Bernanke raises interest rates, get out – it's a low-interest-rate/inflation play, primarily.

Q: Peter?

Krauth: It will be too late to buy silver when the average guy in the street knows the price, and people are waiting five hours in line at their local bullion dealer to get some. Also, if the premiums are 15% or more above the spot price, it may be at least time to wait for demand to cool down.

Q: Jack, I know that the answer to this question is actually part-and-parcel of your target-price prediction.

Barnes: That's right. I believe that the Federal Reserve will be forced to embrace a symbolic rate increase and, in doing so, will put a near-term top on commodities prices. Once that happens, silver should correct over the summer – and ahead of the "QE3" move that I expect to see this fall – which means that silver will run to $50, or higher, by Christmas.

So, yes, put me down for a $50 price tag on silver for your Christmas/holiday stocking.

Q: Shah, what could end silver's run? And I know from our earlier talk that you are preaching vigilance with regard to some possible "wild cards" that investors would do well to watch for. Could you please elaborate?

Gilani: Absolutely. Watch the U.S. dollar. If it rises – and it will, eventually — silver will collapse, at least 50%. In the meantime, ride the momentum higher, but keep a reasonable trailing stop on your silver position. After all, silver is a commodity that is mined; higher prices will make it more profitable for miners to go back to mines they abandoned when prices were lower. It's always good to own what the rest of the world thinks is a good idea to own. It's just that simple with silver right now.

Q: And what could go wrong with your projection?

Gilani: Silver mania could make my prediction of a correction dead wrong. It's not quite Tulip Mania, but it is a mania. And with all irrational exuberances, it's the "Greater Fool Theory" at work: As long as there is precious-metals hype – and hype that fiat currencies are going up in smoke, and that China is the "silver kingdom" – silver prices can go higher.

Q: So, if we take all of those scenarios into account, how should investors position themselves?

Gilani: Buy silver ETFs, an outright play on the price and a play on the miners. Use 20% trailing stops and make sure you raise them as prices rise. Otherwise, I'm waiting for the crash and then I'm going to start accumulating for the next, less speculative, run-up.

Q: We get lots of questions from readers here at Money Morning – on all sorts of topics. Over the past six months, silver has been one of the top subjects. We have a couple here that we'd like to pitch you all, as our panel of experts, to answer.

One reader, a Lee F., wrote in: "I've been reading your articles about buying silver, great stuff. How do I sell my silver without getting scalped?"

Peter, as the author of several seminal reports on buying silver, perhaps you could offer some thoughts?

Krauth: Absolutely. The day you decide to sell some of your silver, get informed. Your best bet is to shop and compare. Look at the "Bid" price that's being offered by a number of bullion dealers that could buy silver from you. In fact, you may want to start by contacting the dealer you bought from, especially if you've established a good rapport.

Make the effort to compare those "Bid" prices. It's your silver and you ought to maximize the proceeds. Under normal circumstances (barring some spike in demand), bullion dealers will typically offer to buy your 1 oz. silver coins or multi-ounce bars right at, or very near, the "spot" silver price.

Where they make their money is when they sell you the silver. Assuming things are calm and there's no buying frenzy, you should expect to pay about 5% above the spot silver price for a 100 ounce silver bar, and about 10% to 15% for 1 oz. silver coins.

Here are a few dealers that have an established reputation:

Q: Great answer, Peter. And since you're on a roll, let's take a look at one more query that we received here in the Money Morning newsroom. Reader David G. wrote in to ask: "Should us silver buyers be worried about silver market manipulation?"

Krauth: Overall, I would say no. That's not to say that I don't think silver's being manipulated.

The CFTC (Commodity Futures and Trading Commission) believes there's been manipulation, and JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE ADR: HBC) are facing four lawsuits vying for class-action status. The suits claim there's been collusion to manipulate silver futures pricing going back to early 2008, and of building immense short positions with an ultimate goal of forcing prices down for their profit.

But as serious as this sounds, as an investor it wouldn't stop me from investing in silver. I think it's much more important to own some silver than to not own some silver – despite this alleged potential for manipulated prices. Furthermore, if such actions were taking place, it seems logical that the resultant legal action and the accompanying scrutiny would bring any such wrongdoing to an end.

My sense is that this bull market in silver will run its course – despite manipulators – and that the free market will, over time, properly price silver at a level that reflects its demand. We're just getting warmed up. The silver market is one that you definitely want to be part of.

[Editor's Note: Earthquakes and nuclear meltdowns in Japan, soaring food-and-energy prices, a numbing federal debt load and savings-account rates that make your mattress an alluring place to stuff your money ... it's enough to make the typical investor surrender.

Not so fast.

There is a way for you to double your money in the next 12 months - and you don't have to hire a Swiss banker to do it. All you need is the right blend of high-yielding investments. You can find out the details by clicking here. Or you can sign up for The Money Map Report, which each month delivers the most pressing profit opportunities available.]

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Join the conversation. Click here to jump to comments…

  1. Michael Hullevad | April 13, 2011

    With an interest rate that is 7-8% NEGATIVE due to inflation i do not think that the price of silver will be affected by a FED rate hike of 0,5%. The USD is toast and it will lose its reserve currency statute very soon with horrific implications for the financial markets.
    It will not help that the trust i fiat money is going down the drain in EU,GB, JP&USA.

  2. D.Anthony | April 13, 2011

    All this and still no mention of the suppresion by JPM & HSBC and the NAKED and illegal short positions that are nearly as large as the total amt of the aboveground silver in existance. Well, guys the truth is (even if you all will not admit it) is JPM and company are losing control of this
    market and are now faced with "physical on demand" because nobody really wants "paper silver"
    You also ignore the fact that there is 10 times (maybe more) paper silver than there is actual silver. Those of us who understood this all along and continued to buy physical are now very wealthy individuals, and guess what…..the govt does not know how much, where it is, or how much i paid for it. Is it liquid ? Just sold a batch of buffalos that cost 10.70 for 38.50 and there is
    no problem getting cash when you need it. Beware everyone of putting your money into an etf or stock that does not GUARANTEE they have the actual metal in their warehouse.

  3. William Patalon III | April 13, 2011

    Dear Money Morning Readers:

    Our first-ever Money Morning guru "roundtable" was exceptionally well received. Thanks to all of you who've already written to us via e-mail, or communicated in some other fashion, to let us know how much you liked this piece, and the format that we used to present it.

    If you haven't communicated with us already, but wish to present your thoughts on our "roundtable," please feel to do so.We'd love to hear your thoughts, comments, critiques, suggestions, etc.

    Given how superbly this roundtable discussion with our experts turned out, I suspect that we'll be doing more of these in thr not-too-distant future.

    If you have some suggestions of roundtabletopicsthatyyou'd liketo see us tackle, please send them along.

    Thanks!

    Respectfully;

    William Patalon III, Executive Editor, Money Morning

  4. William Patalon III | April 13, 2011

    Dear Mr. Anthony:

    Not true, sir. Your comments to the contrary, apparently you didn't really read "all this." Peter Krauth made specific references to this issue, which are now quite well known.

    And since a full recitation of the minute details of this matter would fill an article all by itself, we made sure to link to sources with additional details — specifically for folks who wished to research this further.

    (Remember, too, that this is an edited transcript of this roundtable — including everything just wasn't possible. But what is here pretty much covered the gamut of relevant issues, including the very issue you erroneously claim that we missed.)

    I know you are a fairly regular commenter, which we appreciate. And I believe that I'm correct in stating that you've shared many interesting observations in the past. Perhaps you just didn't read this piece all the way through.

    Regards;

    William Patalon III
    Executive Editor
    Money Morning

  5. James Harman | April 13, 2011

    What do you think of Monex? Theu have a terrible rep with the BBB Will I get my money when I cash in or ask for pjysical delivery? Please tell me more avout their business grom your perspective! thanks.

  6. Les Pfenning | April 13, 2011

    The best thing I read tonite! It helps that I like what they're saying (re. ag) but I'd read anything with these names . Keep it flowing, you fellas are needed.

  7. Ricky | April 13, 2011

    D. Anthony posted THE comment here about naked shorting of silver. NEVER "buy" your "silver" from some BANKER or WALL STREET BROKER who gives you in return a piece of PAPER saying "blah, blah, blah, you have a lot of silver now".

    ALWAYS receive your silver bullion PHYSICALLY. This has the added benefit of removing that silver from the worlds INDUSTRIALLY DEMANDED SUPPLY.

    Rick

  8. Farok Ardesher | April 14, 2011

    The Fed is in a quandary.How can they raise rates when the line 6 unemployment is around 16%.It looks like housing is going into a double dip and the ECB with their shortsighted rate increase will cause the whole of Europe, specially PIIGS,to slow down. Even if the Fed raises rates to 1% by the end of this year,The US will still have negative rates of return. Silver going to $50 by the 4th of July should give us investors real FIREWORKS.

  9. Dietmar Tholen | April 14, 2011

    Thanks!
    Great Information.
    I would like to see this more often, probably on a regular schedule.
    It just requires the capability to understand your language and read between the lines, something not so easy to do for someone who is not fully familiar with the English language.
    Thanks again
    Dietmar

  10. Jeff Keeley | April 15, 2011

    I invest through Monex heavily and have made an enourmous return with this Bullish market. Never once have I ever had an issue with their willingness to ensure all my transactions are satisfied. I have always recieved my funds and or physical delivery in a timely manner s well. I highly recommend them.

  11. Murphy | April 15, 2011

    Excellent.
    Like to see it periodically, say every other month.
    Is there a probability of US Gov confiscating physical Silver held by citizens?

  12. Don George | April 17, 2011

    Great discussion format, and great insights provided by the participants. I'm a holder of Sprott's Silver ETF for precisely the reasons discussed in the roundtable and in the feedback. There are real silver bars sitting in a vault.

    Don George
    Edmonton

  13. dan k | April 17, 2011

    The roundtable discussion was awesome. I love hearing the different ideas of the experts. I have a ton of profits in a paper account in London and some in junk silver. I'm going to start selling at $45, but I am concerned about the dollar. I can't have 100% of my investments in silver. Where do I put future investments?

  14. Louis Cuglietto | April 18, 2011

    I own silver and now want to short it to protect my gains what stocks, etfs are directly
    tied to the price of silver that would give me this play.

  15. Michael Bradshaw | April 18, 2011

    Thank you for the info. It is nice to see you get down to something we can use as common silver owners who whish to have something to retire on. Will the Govt. give us a tax break or will they make honest people turn to servivors of their spending in any way we can?

  16. Sunni | April 24, 2011

    please send the newsletter to my new email address

  17. Paul Garmon | April 25, 2011

    Very interesting. Thanks

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