A Fistful Of Silver

By Aaron Levitt | March 01, 2011 AAA

Gold was certainly the hot investment in 2010. Turmoil in the Middle East and North Africa, rising inflation, and a weakening dollar, strengthened the metal throughout the year. Funds that track the price of gold like the ETFS Physical Swiss Gold Shares (Nasdaq:SGOL) have become quite popular with investors as gold has doubled the returns of the broader market in 2010. With all the uncertainty currently circling the markets, gold has earned its safe haven status in spades. Nonetheless, investors who strictly focus on gold may be missing one of the best bets in 2011.

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Silver Shines Bright
With both industrial and precious metal attributes, silver could be the money metal throughout the remainder of the year. Much of the same investment thesis for gold also applies to silver. However, silver has a better long-term performance. Over the past 20 years silver returns have been nearly triple that of gold's. Since early 2009, silver has posted returns of about 637% versus gold's 255% return for the same period.

These returns have not only been due to a flight to quality assets, but more so based on a huge supply and demand imbalance. Industrial demand for silver is increasing at a rapid pace as emerging economies around the world grow and developed nations resume economic growth. New sources of cleaner energy such as solar, along with various electronic devices account for more than 75% of the silver mined. This built-in industrial demand provides silver with a much stronger price floor than gold. On the supply side, mine production is lower than total annual world consumption and is slowly eating away government inventories. Research firm CPM Group estimated that reserves of unmined silver in 1990 stood at approximately 2.2 billion ounces. Currently, that figure stands at less than 1 billion ounces. Estimates by the U.S. Geological Survey suggest similar exponential diminishing rates for silver.

The "poor man's gold" hit an all-time high of $50 an ounce in 1980, and many analysts believe that the metal will get close to those numbers by the end of the year. Most have price targets in the low $40s, and believe the unwinding of large short positions by investment banks could be the next catalyst to set off a massive rally in silver.

Profiting from the Poor Man's Gold
In the short term, continued unrest in the Middle East will increase prices, while the long-term industrial supply/demand imbalance will help support those prices. Benefiting from both its safe-haven asset status and major industrial metal, investors may want to consider adding silver to a portfolio. There are plenty of ways for investors to take advantage of the growth in the poor man's gold.

Both the iShares Silver Trust (NYSE:SLV) and ETFS Physical Silver (NYSE:SIVR) hold physical silver bullion and allow investors to participate directly in price movements of the metal. Over the last 10 days, the continued tensions in Libya have caused the ETFs to rise about 13%, while physical gold ETFs are up only up about 5%. Longer-term holders may want to consider the SIVR as it offers investors a cheaper expense ratio of 0.30%. For investors preferring to used managed futures, the PowerShares DB Silver (NYSE:DBS) can be used.

Additional leverage and benefits can be found with buying the companies that physically mine commodities. Silver miners like Pan American Silver (Nasdaq:PAAS) and Endeavour Silver (NYSE:EXK) have seen their prices surge over the last year. For investors wanting a broad approach to adding miners, the Global X Silver Miners ETF (NYSE:SIL) tracks 25 different miners and has become immensely popular with investors in its short life span.

Finally, for investors wanting to add a little pizazz to their silver holdings, the performance of both the leveraged ProShares Ultra Silver (NYSE:AGQ) and royalty firm Silver Wheaton (NYSE:SLW) have been nothing but stunning. The ProShares fund seeks to double the daily returns of the price of silver, while Silver Wheaton functions as a silver streaming company and doesn't do the heavy lifting or mining. In exchange for an upfront payment, Silver Wheaton then has the right to purchase all or a portion of the silver production, at a low predetermined fixed cost.

Bottom Line
While gold has been getting most of the attention lately, due to the various political and economic problems facing the world, silver may be a better portfolio bet. As both a safe-haven asset and major industrial metal, silver will benefit from both economic growth and volatility. The previous funds and stocks, along with the UBS E-TRACS CMCI Silver ETN (NYSE:USV) make ideal ways to play the metals rise. (This method may seem arcane, but many well-established strategies rely on it. Check out Trading The Gold-Silver Ratio.)

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