Forecasting prices for anything can be tricky. And a precious-metal commodity such as silver is no exception.
With gold holding the leash on its "lapdog" – silver – the performance of the so-called "yellow metal" holds the key to silver prices in the New Year.
Here's why: For several years leading up to the 2008 stock-market panic, it typically took 55 ounces of silver to buy an ounce of gold. Today, a gold ounce will cost you just 50 ounces of silver.
The message: There's been a fundamental shift, where precious metals investors see silver as the "more-affordable" true-money option. So, I expect this newer 50:1 ratio to hold, and perhaps to even decline – which portends a relative outperformance for silver versus gold.
And that brings me back to my price prediction.
If we use the current 50:1 ratio – and my expectation that gold will be trading at $1,900 an ounce by the end of 2011 – I believe we're looking at a target price of $38 an ounce for silver by the end of the year.
That represents a 33% return over the recent price of $28.50 an ounce.
That's a target I believe to be very realistic, given the times.
How to Buy Silver – The "Other" Precious Metal
As a longtime observer of the mining, commodities, and precious-metals markets, I'll be the
first to admit that – as precious metals go – silver doesn't have quite the same mystique as gold.
But let's be honest: The "white metal" has its backers, too.
In fact, when Money Morning published its "How to Buy Gold" special report back in July
2010, one of the most common responses we got was: "When can you do the same for silver?"
So in September 2010, we did publish a full report on silver – and recommended it as a
"Buy." At that time, the "white metal" was trading at about $19 an ounce. Readers who took our
advice have reaped a 50% return since then.
Although gold possesses the greatest allure of precious metals, silver has a longstanding
tradition in many cultures – a tradition that reaches back thousands of years, in some cases.
Here in the United States, silver alloys were still present in some of our everyday coins as
recently as 40 years ago. Today, however, silver is no longer viewed that much as a monetary
metal. But that's because about 40% of silver goes to use in industrial applications.
The physical silver market is small, with annual demand of slightly less than 900 million ounces.
Silver prices are volatile – on the upside and the downside. After hitting a bull-cycle high of
nearly $21 in early 2008, the global financial crisis tipped silver prices into a near-freefall: They
declined by more than 50% to drop into the $9 range later that year.
Since that financial-crisis nadir, silver prices have soared and have eclipsed that 2008 high.
An important metric to understand and watch is the silver-to-gold ratio. It tells you how many
ounces of silver it takes to buy one ounce of gold. Historically, that ratio is 16 to 1. On this basis
alone – with gold sitting at nearly $1,389 an ounce at midday yesterday – silver should be at $86.75.
That's a long way from the current price of $28.50.
Popular Forms of Silver
You can invest in silver in a variety of forms. Let's take a look at some of the most popular.
Physical Silver can be purchased in a variety of sizes and weights, which determines its price.
Most typical are one-ounce silver coins, like the Austrian Silver Philharmonic, the American Silver
Eagle, and the Canadian Silver Maple.
Their prices vary slightly due to differences in silver purity, with the Silver Maple being the
highest at 99.99% pure. You'll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.
How Small Should You Go With Your Silver?
ome investors wonder if they should buy
Even so, keep in mind that you'll pay a
Another popular option is the 100-ounce silver bullion
bar. It commands a 5% premium over the spot price of silver,
meaning the bar is currently selling for around $2,000.
Investors buy these coins and bars essentially for their
silver content and not for their value as collectibles. If you're
looking to build a silver stash – either large or small – bullion
dealers may be the easiest way for investors to do so. But do
your homework first, and check them out before you buy.
Also, avoid paying more than the premiums I noted above for
either coins or bars.
Here are a few silver dealers that have an established
- Kitco.com: Premiums are fair, and the selection is
usually quite good. They have offices in both New
York and Montreal.
- Asset Strategies International Inc.: This dealer is
located in Rockville, MD. Asset Strategies also offers
storage options outside U.S. borders.
- Camino Coin LLC (caminocompany.com): Burlingame, CA.
- American Precious Metals Exchange (apmex.com): Oklahoma City, OK.
- The Tulving Co. (tulving.com): Newport Beach, CA.
- Gainesville Coins (gainesvillecoins.com): Lutz, FL.
Exchange-Traded Funds (ETFs) are another option for silver ownership.
ETFs are a simple and convenient way to establish a claim on the silver itself. Simply buy units
of the iShares Silver Trust ETF (NYSE:SLV). With some $5.5 billion in assets, SLV is the world's
largest silver-backed ETF, with JP Morgan Chase & Co. (NYSE:JPM) in London as its custodian.
SLV shares, which represent approximately 1.0 silver ounce each, are easy to buy and sell through
your brokerage account.
Certificates: You can also acquire "paper silver" through Perth Mint Certificates (PMC).
The government of the state of Western Australia guarantees these certificates. Vault-protected
and insured, PMC offers the only government-backed bullion storage program on an allocated or
unallocated basis (this means stored separately for you [allocated], or stored along with everyone
In an "allocated" situation, your coins or bars are removed from the mint's operating inventory
and placed in the Perth Mint Depository vault with your own account number. Allocated metals are
not part of the mint's balance sheet, so you will pay storage fees.
Minimums are $10,000 USD for your initial PMC purchase, with minimum subsequent
purchases at the $5,000 USD level. If you hold your coins, bars, and bullion on an unallocated
basis, they can be converted into specific coins or bars and you can then take delivery, if you wish.
"Paper" silver is not the same as "physical" silver. Despite the government backing and long
history, you have to realize that, with PMCs, you're still relying on someone else's promise. By
contrast, with physical silver under your control, you've eliminated any counterparty risk.
The Perth Mint Certificate program is a solid way to gain international diversification for
your silver holdings. For more information, check out Perthmint.com (note that Kitco and Asset
Strategies also offer PMCs).
The Perth Mint was established in 1899,
The escalating interest in precious metals brought about
by the rapidly accelerating fears about the U.S. economic
outlook has generated a real increase in worries about gold-and-
Back in 1933, in the depths of the Great Depression, U.S.
President Franklin D. Roosevelt signed Executive Order 6102,
effectively forbidding the ownership of gold coins, bullion,
and certificates by U.S. citizens. In this way, the government
coerced the public to turn in their gold for $20.67 an ounce – which the government shortly
thereafter "revalued" to $35 per ounce.
What's especially interesting about EO 6102 is the absence of any mention of silver…
Now we can't know if there will ever again be anything akin to this Oval Office edict – much
less what it might say and what metals or other commodities it might cover. But going on what
happened in the past, and considering the size of the silver market relative to gold, silver may be
a way to own a precious metal that just might sidestep any risk of future confiscation.
However, if the government getting its hands on your hard-earned silver is a personal
concern, then you may want to consider a particular kind of silver investment: owning silver
that's held outside of the country where you reside.
For U.S. residents, consider the Central Fund of Canada Ltd. (AMEX:CEF). It's a closed-end
fund that's been around since 1961 and that owns physical gold and silver. It's domiciled in Canada, with its precious metals stored
in the vaults of a Canadian-chartered
bank. CEF often trades above its net asset
value (NAV), but you should avoid paying
more than a 5% premium. See www.centralfund.com for more information.
But my favorite "silver-only" fund
is the ETFS Physical Silver Shares (NYSE:SIVR). Issuer ETF Securities Ltd.
is one of the largest ETF providers in
Europe, with some $16 billion under
management. Each share is about the
equivalent of 1.0 ounces of silver in U.S.
dollars. As well, it seems to trade with
a net asset value that boasts almost no
premium or discount, and management
fees are reasonably low – around 0.30%
annually. The company indicates holds
the physical silver backing the units in a
vault in London.
As I've said before, there's no
substitute for having some physical
precious metals stored under your own direct control, at your own fingertips. And even the SIVR
silver ETF shares are a paper claim on silver. But it does add another dimension to your preciousmetals
holdings, and accomplishes that with storage in another jurisdiction.
Profiting From Junk
Despite its name, "junk silver" is not junk.
Indeed, this form of silver investing has provided excellent returns over the past decade. Junk
silver consists of U.S. quarters, dimes, and half-dollars minted before 1965, since coins struck
before that time contain 90% silver and 10% copper.
But junk silver's real attraction is that it offers investors the best of two possible investing
extremes that seem to be attainable right now:
- First and foremost, during intense bull markets in silver – like the one we're experiencing
right now – junk silver tends to outshine (and outperform) silver bullion.
- But if some of investors' darkest fears are realized, and the U.S. government's
overenthusiastic printing of money were to transform the greenback into so much worthless
paper, then 90% of U.S. silver coins would be used for the purpose they were originally
minted – as money that can be spent.
The term junk silver was adopted because the coins being referenced typically have no
collectible value. Instead, junk-silver coins are valued for the bullion value of the silver that
they contain. Here in the United States, the most commonly collected junk-silver coins are the
Mercury and Roosevelt dimes, Washington quarters, and the Franklin and Kennedy half-dollars
that were minted in or before 1964. That's because these coins have a 90% silver composition
that's known as "coin silver."
There are seven solid reasons to make junk silver part of your portfolio. In short, junk silver:
- is a finite commodity.
- is no longer being produced (the scarcity factor).
- is a product (currency coins) that is easily recognizable.
- is divisible, meaning you're able to use small amounts to pay for something.
- requires no assaying.
- was produced by the U.S. government, meaning everyone everywhere recognizes what you've got, so you don't need to run any tests to prove its value.
- is utilitarian, meaning you could actually put change into a payphone (remember those?) or a vending machine to purchase a product or service.
Kevin Drost, preferred client relations manager at Asset Strategies International Inc., says
many of his company's clients feel there's an eighth reason to own junk silver that's no less
important than the seven mentioned above:
- Since it was produced by the government itself – and is "legal tender" – it can't be
The Mathematics of Junk Silver
Junk silver is sold in bags of either $100 face value or $1,000 face value. Typically, the $100
face value bags contain 1,000 dimes, or 400 quarters, or 200 half-dollars (the coin denominations
are usually not mixed).
Since these coins were in circulation for decades, wear and tear means they no longer contain
90% silver. In fact, they typically contain about 71.5 ounces of silver. So at recent prices of
roughly $20 an ounce, $100 face value bags run about $1,530, which includes a 7% premium to
the spot price of silver. On the smaller bags, that's the average premium you should expect to pay. The $1,000 face value bags, of course, contain 10 times the number of coins as the $100 face value bags, with a small pricing advantage of 5% premium over spot silver prices.
Moves to Make Now
Silver hit a low of $4.06 per ounce back in November 2001. Since then, the returns of the
"white metal" have been extremely rewarding for those early – and patient – investors.
And the surge may not end even at our $38 price target. According to a recent Money Morning
forecast, silver could reach $50 an ounce by the 2012 presidential election – a gain of 75% from here.
silver, take some time to peruse some of Money Morning's recent research reports on this
very topic. For instance:
- If you're new to precious metal investing and would like a primer, check out Special Report:
How to Buy Silver.
- For a more-specialized silver strategy focusing on so-called "junk silver," take a look our
special report: Though it's Called "Junk Silver," the Profits Aren't Trash.
- To help you understand just why silver is suddenly in the headlines alongside gold, we
recommend: Silver is Emerging From Under Gold's Shadow.
- If options are part of your personal portfolio strategy, here's a piece that ran just this week
that deals specifically with using options to profit from silver: Three Ways to Play the Silver
Rally – While Limiting Your Risks with Options.
- Finally, at least as far as silver goes, I'd like to recommend two pieces that I wrote myself –
the "Buy, Sell or Hold" piece on Silver Wheaton that prompted this column, and a detailed
strategy piece that caters to more-experienced investors: Investing in Silver: Three Ways to
Profit From the Projected Breakout.
And if you have follow-up questions for us about "the other precious metal," please feel free to
send them to the Money Morning Mailbag at firstname.lastname@example.org.
[Editor's Note: One tiny mining company… one HUGE discovery… $49.2 billion huge – from the most foughtover
metal on earth. Not gold, uranium, or iron… this scarce metal is critical to energy's future, and everyone
wants a piece. Demand from the U.S., China, and even the OPEC countries, is about to send shares of this quiet
company soaring. This presentation tells the full story. ]
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.