Even the gold bulls in the MoneyWeek offices have got bored with reading about gold. But we’ve long been fans of silver too. Should we still be buying?
We never thought we’d say this here at MoneyWeek, but the fact is that we’re getting bored of reading about gold in the mainstream press.
It’s not that we don’t love gold (we do), nor that we don’t think it makes a fabulous Christmas present (the Evening Standard suggests giving Kruggerands this year, and we think that’s a fine idea). And it’s not that we don’t think the gold price will keep rising into 2006 (we do).
It’s just that now the mainstream press has started crawling all over the story, we wonder why they are ignoring all the other precious metals.
There has barely been a mention outside the Financial Times about the massive leap in the platinum price (up 185% since it bottomed in 1999) and very few British journalists seem to have noticed the silver price, which has risen 62% since 1999, 88% since we first suggested you buy it in MoneyWeek in 2001, and nearly 30% this year alone. So this week, we’d like to redress the balance slightly and talk only about silver.
Silver has long been what Martin Spring, editor of the On Target newsletter, calls “the neglected orphan” of the precious metals markets. But it really shouldn’t be. Why? Because silver actually has some of the best-looking supply and demand fundamentals in the metals markets.
For years, says Spring, investment sentiment towards silver “has been depressed by the perception that its major use, in film and paper for photo imaging, is in terminal decline”, thanks to the rise in the popularity of digital technology “with its advantages of immediacy, flexibility and transmittability”.
But this doesn’t make any sense. Photography only accounts for about 8% of total demand for silver, and while it is true that demand from this source is falling by about 5% a year, 85% of the metal used in it is recycled – so scrap supply from this source is falling almost as fast. Overall, the “net negative impact on demand is minimal”, says Spring.
In any case, regardless of any fall-off here, the demand for silver is rising fast, due to both increasing demand for the raw material for the manufacture of jewellery and silverware, and because it has so many industrial applications.
It is, for example, one of the best electrical conductors of all the metals, and as it doesn’t corrode, is used in practically all switches. “Every time a homeowner turns on a microwave oven, dishwasher, clothes washer or television set, the action activates a switch with silver contacts”, says the Silver Institute.
And this kind of usage is only going to rise. A recent posting on Fullermoney.com pointed out that the EU is pushing its Reduction of Hazardous Substances (RoHS) policy on to electronics producers around the world with the aim of eliminating lead use in soldering. And the substitute for lead-based solders? A mixture of tin and silver.
However, the real case for investing in silver lies not on the demand side (although this is clearly growing), but on the supply side. You see, silver really is quite rare. There are only 22 or 23 completely pure silver mines operating around the world (any other new silver dragged out of the earth is a by-product from mines mainly engaged in digging for lead, zinc and copper), and overall production was flat this year and is expected to be flat again next year.
Mined silver has been insufficient to meet demand every single year for the last 15 years. According to the CPM Group, a commodity research provider based in New York, newly refined supply fell short of industrial demand by 44.5 million ounces in 2004 and will be short by another 31.4 million this year. This hasn’t been a huge problem because the world has been able to meet the deficit from inventories, and sales from official stockpiles.
However, today the US government stockpile is all but gone and sales from other official sources appear to be declining too (China sold over 60 million ounces in 2003, for example, but only 34 million in 2004). This, Martin Spring suggests, means that “the remaining reserves of above-ground metal held by the central banks of China, Russia and India from the melting down of withdrawn coinage are running down”. In 1990, says CPM, there were around 2.2 billion ounces of silver held in above-ground stocks. Today, there are probably only about 300 million. That’s a 50-year low.
And unlike gold, silver gets used up. According to Jason Hommel on the SilverStockReport.com, “about 95% of the gold ever mined still exists in above-ground refined form. In contrast, about 95% of the silver ever mined has been consumed by electronics and jewellery. And as a silver ring or necklace, for example, costs about $50 an ounce (spot silver currently costs just over $8 an ounce), the silver is not recoverable or recyclable at a profit to the silver jewellery buyer until we exceed those prices.
‘So while gold is going to skyrocket in price, due to central banks switching from selling to buying, silver is going to skyrocket in price much more due to the silver shortage.”
Anyone in any doubt as to the critical tightness of the silver market need only look to the palaver surrounding Barclays Global Investors’ (BGI) attempt to launch a silver Exchange Traded Fund (ETF) in the US earlier this year. BGI already runs two gold ETFs (StreetTracks Gold Trust and iShares Comex Gold Trust) in America, which allow investors to get direct exposure to the gold price by buying shares that represent a tenth of an ounce of gold stored in a vault.
The idea is that a silver ETF is supposed to work in the same kind of way, so as MoneyMorning’s John Stepek points out, when the plans for it were first filed in June with US regulatory body the Securities & Exchange Commission, most people expected approval to go through rapidly. But it didn’t. Instead, the fund is still stuck in registration. And according to James Pacetti of New York consultant ETF International, the main reason is opposition from the Silver Users Association, a lobby group representing companies that use silver for industrial purposes.
Why are they opposing the launch? Because members of the group, which include up-market jeweller Tiffany and photography group Eastman Kodak, are worried that there’s not enough silver to go round. One of the SUA’s main aims is to keep silver prices low. If the ETF is launched, the group says that the sheer volume of silver that would have to be purchased to back up shares in the fund would push the price of the metal higher. This in turn would increase the business costs of their members.
“These companies use silver on a daily basis,” says Stepek, and that means they should know more about supplies of the metal than anyone else. So who are we to doubt their judgment? “When they are admitting that supply is too tight to meet demand, it seems to back up the belief that silver looks cheap at the current price of around $8.44 an ounce.”
A final argument in silver’s favour for those who believe (as we do) in reversion to the mean, is the level of the gold/silver ratio. At the moment, you need 63 ounces of silver to buy one ounce of gold. 2,500 years ago, when coins were first made in ancient Greece, the ratio of gold to silver was generally between 10:1 and 13.5:1. In the 1930s and 1940s the ratio reached 90:1 or higher, and in 1991 it peaked at about 98:1.
For the last decade it has hovered at around 60:1. However, the long-term mean (the last 350 years) is more like 30:1, suggesting that to bring things back into balance, either the gold price has to fall, or the silver price has to rise. Which will it be?
Regular readers will know that at MoneyWeek we are long-term gold bulls, so we rather think it should be the latter. The existence of an imbalance in the gold/silver ratio is far from the most important reason to buy silver. Indeed, many may think it no reason at all – but it is just one more thing that gives pause for thought. Add it all up and it looks as if the bull market in silver may have only just begun.
The only problem here is that silver’s pretty inconvenient to invest in. Buying stocks in silver-mining companies is one way to play the metal, but that only offers indirect exposure. You can use spread betting, but that’s a risky way to play any market, let alone a thinly traded commodity like silver.
And even buying silver in the form of bullion isn’t ideal – in the UK, unlike with gold, you are charged VAT. And that’s not to mention the fact that it’s not as easy to store. If you want to invest in physical gold, you can just buy a few ingots and pop them in your desk drawer. Not so with silver. It’s a lot cheaper than gold, so you need to buy a lot more of it to get a decent level of exposure.
If, for example, you wanted to invest $100,000 in precious metals, you could – at current prices, says Martin Spring – get a manageable 6kg of gold, a more manageable 3kg of platinum, or an utterly unmanageable half a ton of silver – not the easiest package to transport home.
We look forward to the day when the BGI ETF is approved and all these problems go away, but in the meantime we look at the best ways to get exposure to silver via the equity market (see below).
How to invest in silver
The most obvious way to buy into the silver sector is via the stockmarket. However, this isn’t as easy as it sounds. Most of the best silver mines are owned by the big, diversified miners, meaning that it’s hard to get pure exposure to them. Also, only 30% of the world’s silver comes from silver mines – the rest is a byproduct of other mines, making it even harder to get pure exposure at all.
The largest silver miner in the world is BHP Billiton (BLT), a MoneyWeek favourite. Also among the top-ten biggest producers are copper producer Kazakhmys (KAZ), which is about to enter the FTSE 100, and which is a buy for “long-term, risk-hungry investors with cash to spare”, says The Independent, and Rio Tinto (RIO), which has a “profits momentum that is showing no signs of slowing down.”
One much purer play listed on the Aim market in the UK (and one we quite like) is Minco (MIO), which is in the process of developing silver mines in Mexico. Otherwise, for pure exposure investors need to head to North America where most of the bigger silver miners are listed.
The two majors are Pan American Silver (PAAS) and Silver Standard (SSRI), both of which are very liquid, are big producers, have high levels of reserves and “belong in everyone’s silver portfolio”, or so says Ed Steer in Financial Sense.
Hecla Mining (HL) is another possibility in the US. It produces silver at not much over $2 an ounce, meaning that, with the price over $8, its margins must be looking pretty good. Silver Wheaton (SLW) and Western Silver (WTZ), both listed in Canada, are also reasonable looking.
Those who would prefer to invest via a collective investment might be wise to wait until the Barclays silver ETF is listed in America, but those who like gold too could consider the Merrill Lynch Gold & General Fund, which, while it invests mainly in gold, does have exposure to other precious metals.
If you do take this route, though, you might be wise to do it via a fund supermarket – the Gold & General charges high up-front fees if you buy direct or via an independent financial adviser.
Finally, if, despite the storage problems and VAT, you want to buy direct, coins and medals can be bought from www.24carat.co.uk. And most spread bet firms allow you to bet on the price of silver, although this is a risky way in: the silver market is small and prices can be volatile over the short term.
A versatile metal with many applications
Silver’s use as a medium of exchange has been known throughout history. Silver coins begin to appear in the eastern Mediterranean in 550BC, and by 269BC the Roman empire had adopted silver as part of its standard coinage. Silver coins are still produced (the US poured 15.5 million ounces into coins and medals in 2004) and a 1912, 25 cent coin would now set you back $1,750.
But silver usage is not limited to money, nor is it limited to jewellery. Instead, its many unique properties – its strength, malleability and ductility; its electrical and thermal conductivity; its sensitivity to light and its ability to withstand extremes of temperature – make it indispensable in a variety of industries. It is well known that silver is needed on photographic paper (it reacts to light, and creates the picture), but that’s just the start of it.
Silver is used as cathodes in every kind of battery – from a tiny quartz watch battery to large batteries for tools. Thanks to its smoothness, it is used in jet engines for lubrication and owing to its strength, ductility (ability to turn into wire or very thin sheets) and thermal conductivity, it is used to solder everything from water pipes tocomputer circuit boards and refrigerators (it has good resistance to temperatures).
Also, because of the metal’s antibacterial properties, it is used to purify water used for drinking, swimming pools and in food processing. It is also one of the best natural catalysts (compounds that enable or speed-up chemical reactions) around, and has become essential to the production of chemicals for the $300bn plastics industry – and hence to the production of everything from adhesives and heat-resistance surfaces to car parts and toys.
How to begin your own silver collection
The main rule to remember, when it comes to collecting silver, is that branded goods fare much better than anonymous pieces, whatever their quality. This applies to both antique silver and contemporary silver, but clearly the most money is to be made by identifying the silversmith stars of the future early. So how do you do it?
Start, says The Times, by taking a look at this year’s Jerwood Applied Arts prize – the award has been running in collaboration with the Crafts Council for 11 years and celebrates excellence in the applied arts – this year it was awarded for German silversmith Simone ten Hompel’s metalwork.
Other good new names worth looking at, gallery owner Stephen Grey-Harris told The Times, are Gerald Benney and Anthony Elson. Otherwise, look at the Goldsmiths’ Company website, which provides a directory of silversmiths, and consider visiting the 2006 Goldsmiths’ Craftsmanship and Design Awards (28 February to 3 March, 01895-420052) for inspiration.
Finally, if you want to start a collection in time for Christmas – or help someone else start one – head to G-H Modern, a show held in association with the London dealers Adrian Sassoon and Claire Beck, and featuring five new silversmith talents: Sidsel Dorph-Jensen, Hiroshi Suzuki, Ndidi Ekubia, Junko Mori and Alistair McCallum (until 23 December, 0117-973 7300, g-hmodern@btconnect.com). Choose the right piece and with a bit of luck you’ll find yourself with not only a thing of beauty, but a thing of rising value too.