Silver Investing and the current economic environment

I have been doing a lot of reading on the different ways to invest in silver as well as keeping an eye on the current economic news, which seem to have a very negative trend these days. I have not seen a U.S. economy with as many problems since the late 1970’s. Energy and food prices are rising, employment and house values are falling and none of these trends seem to be reversing soon. If you are older, like myself, you can remember that investments in precious metals did very well in the 1970’s and early 1980’s.

Looking at silver investment, I see some pros and some cons. The biggest pro of silver is that the metal has a significant demand from several sources. Industrial use, photography, coins, jewelry and other decorative uses, and investor demand add up to almost 900 million ounces per year. Global mine production, on the other hand, was about 670 million ounces in 2007, leaving a 200 million ounce shortfall that is made up from the scrapping of old silver products and government sales. Silver is finding growing uses in industrial applications, so the trend towards higher silver prices makes economic sense.

The challenges for the silver investor are a little daunting also. A big factor is the storage of physical silver. $10,000 worth of silver weighs almost 600 lb. and takes up a lot of space in the old gun safe! $10,000 of gold is about one pound. Now you know why the storage fees for silver at the bullion companies are so much higher than for the shiny yellow stuff. I lived in Las Vegas when Ted Binion was killed by his girl friend (allegedly) so she and her husband could haul off his $7 million silver hoard buried in the desert. They couldn’t figure how to transport it.

For the small investor, recently minted silver coins like Silver American Eagles or Silver Canadian Maple Leafs seem like a good option. Single coins or small lots can be picked up without too much mark up. I would check Internet prices and look for a local dealer to compare costs, sales tax and shipping to get the best value. This is definitely a buy, accumulate and hold strategy because the transaction costs are significant and the investor will be looking for a big run up in silver values.

For market traded securities, there are some interesting options for the silver investor. As a mining product, silver is usually a by-product from some other base metal mine and pure silver mining stocks tend to be of the very speculative variety. A fairly recent entry into this arena is Silver Wheaton, symbol SLW. Silver Wheaton has a unique business structure where they buy the silver production of several large gold and base metal mines at a fixed price of around $4 per ounce, then can resell the silver on the open market. They have 25 year to life-of-mine contracts and production is still ramping up at most of their contracted mines. SLW has very low overhead and tax structure so the majority of the profits on silver sales flow to the bottom line. Share prices of SLW have definitely been volatile, so the prudent investor should pick his entry point. Options also trade on SLW.

There are two silver based choices in the ETF (exchange traded fund) world. First up is the iShares Silver Trust, symbol SLV. SLV shares represent a share of actual silver bullion held by iShares. The amount of silver represented by each share will slowly decline as silver is sold to pay storage and management fees. This is similar to holding metal with one of the bullion houses, but probably less costly unless you are holding a very large amount of bullion. The second ETF available is the PowerShares DB Silver fund, symbol DBS. DBS tracks the Deutsche Bank Liquid Commodity Silver Index by investing in silver futures and rolling them as they mature. Expenses for DBS appear to be similar to SLV. If you compare the charts of SLV and DBS they track very similar, with SLV a few percent ahead over the course of a year. This is probably due to SLV’s 8 times advantage in net assets. However, DBS does have options trading while SLV currently does not, for you more aggressive, short term trader types.

The bottom line, is current economic conditions are ripe for investing in hard assets and silver has some interesting supply and demand considerations. Hopefully, I have listed a few interesting ways to invest in silver.