Peter Krauth, Contributing Editor, 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
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
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:
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
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
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 [
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 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-
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
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 http://www.centralfund.com. 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
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.
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
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