Investing in Silver: How to Succeed

Investing in silver can come in a variety of forms. There are many ways to profit from the precious metal via ETFs, physical purchases and Perth Mint Certificates. …

Investing in silver can come in a variety of forms. There are many ways to profit from the precious metal via ETFs, physical purchases and Perth Mint Certificates. Continue reading the article below from Money Morning.

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 $2,500 an ounce by the end of 2011 – I believe we’re looking at a target price of $50 an ounce for silver by the end of the year.

That represents a 43% return over the recent price of $35 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.

Those investing should remember, 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. 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, as I write this – silver should be at $86.75.

That’s a long way from the current price that’s trading under $40.

Popular Forms of Silver

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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.

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 reputation:

  • 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 ( Burlingame, CA.
  • American Precious Metals Exchange ( Oklahoma City, OK.
  • The Tulving Co. ( Newport Beach, CA.
  • Gainesville Coins ( 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 else’s [unallocated]).

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 (note that Kitco and Asset Strategies also offer PMCs).

Confiscation Fears

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-silver confiscation.

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 precious-metals 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 confiscated.

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. According to a recent Money Morning forecast, silver could reach $50 an ounce by the 2012 presidential election – a gain of more than 40% from here.

Action to Take: If you would like some additional insights on strategies for investing in 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.
  • And finally, any good portfolio strategy won’t stick to just one type of hedge, especially in a volatile market. To diversify your portfolio protection, click here to view our latest presentation: Cut Your Time to Retirement in Half With the "Rich Trick".

 This article was re-published with permission from Money Morning.


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