FYI | Dec 20 2013
By Sean Brodrick, Resource Strategist, The Oxford Club
They say that a bell never rings at the top and the bottom of the market. But there’s some real jingling going on in silver right now. And it may just be the start of something big. Could you profit from it? Yes!
There’s no denying that silver took a beating in 2013. Recently it was down 33.6% for the year, even worse than gold’s abysmal 25% loss. Clearly, investors hate silver.
Therefore, if you’re going to look for bargains, silver is a good place to start.
Here are three reasons why.
1. Silver Coin Sales Are Huge
Mom-and-pop investors know silver is a bargain at these prices. Sales of silver American Eagles have hit a record 42.4 million this year. That’s up 24% over last year. Silver is trading at the same price it was in 2008, but coin sales are more than double what they were then.
And it’s not just the American Eagle. Australia’s mint sold 7.78 million ounces of silver through November. And Canada’s mint had sold 6.7 million silver Maple Leaf coins through the third quarter, up 39.6% year over year.
2. Silver Is Also an Industrial Metal
Silver is an excellent conductor of electricity. You’ll find it in your cellphone, car, TV, computer, monitor and printer. It’s used in solar panels, as a chemical reagent and more.
More than half of all silver is used to make industrial products. Demand for silver as an industrial metal has exploded as technology advances and new products (like iPads) are introduced.
The Thomson Reuters GFMS Interim Silver Market Review, released last month, says that industrial usage will account for 57% of total silver demand in 2014. That’s the highest percentage since it started keeping track a quarter-century ago.
Silver mine supply is expected to grow by about 4%. Because most silver supply comes as a byproduct of mining other metals, its supply is not as sensitive to price as you might think.
Meanwhile, the global economy should grow 3.5% in 2014, up from 2.7% this year. Some economists are saying the U.S. economy could experience its fastest growth in a decade. More economic growth means more demand for silver, both industrial and consumer.
3. Silver Should Bounce Higher From Price Support
Silver hasn’t dropped below $19 since 2010, and it’s been supported at that price since June. If silver can withstand hedge fund raids during the next four weeks, the silver bells may be ringing. Have your shopping lists ready, because those after-Christmas sales on this metal may be irresistible.
The big wild card is funds that invest in physical silver. My sources say such funds hold a little over 863 million ounces. Despite some recent selling by the iShares Silver Trust (NYSE: SLV), physical holdings of silver are slightly up this year. In contrast, gold ETFs are selling gold hand over fist.
Investment demand for silver accounts for 24% of overall demand, up from just 4% in 2003. That huge swing is due to the physical silver ETFs.
Unlike gold ETFs, which are held mostly by institutions, investors in silver ETFs are mainly individuals.
If silver investors sell the ETFs, that could send silver prices down below $18 in a hurry. But as long as investors in silver ETFs are content to sit on their holdings – and even add to them on price weakness – that puts support under the market price.
How You Could Play a Silver Rally
I’m a big fan of buying physical metal, especially at these dirt-cheap prices. For one thing, it’s a Christmas gift for my kids that they’ll (hopefully) treasure for a lifetime. Remember The Oxford Club recommends that up to 5% of your wealth should be allocated in some form toward precious metals.
If you’re more speculative, you can look at funds that hold physical silver. Examples would be the iShares Silver Trust and ETFS Physical Silver Shares (NYSE: SIVR). The more-popular iShares has a lower bid/ask spread. That could make total costs slightly less. For its part, ETFS Physical charges only 30 basis points in fees a year. That makes it the best low-cost choice in the silver commodity space.
And if you like miners, Global X Silver Miners (NYSE: SIL) is an ETF that tracks a basket of 32 miners. Alternately, there is the iShares MSCI Global Silver Miners (NYSE: SLVP). It has low liquidity, so I prefer the Global X.
Good investing and Merry Christmas,
Sean
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