Is it time to add a little silver to the mix in your portfolio? Investors doing so will need to be cautious and patient at the same time.
The market has certainly bounced considerably recently following a brutal years-long bear market where the value of the metal fell dramatically.
The slide in prices started in early 2011, when the price fell from $48.70 a troy ounce to $13.71 by late last year, according to data from the London Bullion Market Association. Prices have subsequently rebounded to more than $16 an ounce as investors piled in.
“We are seeing very strong investment demand and that makes me think silver prices can move higher,” says Jeff Christian, managing partner at consulting firm CPM Group in New York, and a multi-decade veteran of the commodity markets.
Coin sales have gone up. Investor demand for silver has historically been a driver of prices, rather than its use in industrial processes such as jewelry manufacturing or electronics. One indication of burgeoning investment demand is the market for solid silver coins, such as those made and marketed by the U.S. Mint.
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Silver coin sales in the first quarter increased 23 percent from a year ago to 14.8 million ounces, according to a research note from CPM Group.
Christian doesn’t see a straight upward trend in prices, but believes prices will remain close to current levels for the next 24 months before something — a financial crisis, stock market volatility, or geopolitical tension — will trigger a spike higher, possibly as high as $25.
That “something” could come from a variety of sources.
“At times when central banks are becoming ever more risk-seeking, it is understandable that investors might see a reason for some precious metals,” says Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland.
The money-printing programs of the Federal Reserve, European Central Bank and other similar institutions have some investors increasingly concerned about whether paper money will hold its purchasing power over the long term.
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That so-called inflation hedge is one reason investors like to hold at least some portion of their portfolio in precious metals. In addition, the price of silver tends to be uncorrelated with those of other asset classes. That means silver can be a useful as a diversification tool within a portfolio.
But most professional investors advise that silver should be no more than a few percentage points of an overall portfolio.
The price is low. Silver isn’t exactly expensive. “I happened to go to an auction and was stunned how cheap silver was,” Milligan says. “I had a look at the chart today and realized that the price is at 2010 levels.”
Still, he warns that when you purchase silver you are betting that the price will increase. A bar of the metal doesn’t pay any dividends. For that reason, he prefers financial assets, such as stocks and bonds.
The lack of dividends is not the only issue.
“If you buy the physical silver then there is the problem that you have to store it and insure it,” says Jay Jacobs, director of research at exchange-traded funds provider Global X Funds in New York.
A simple way around that is to buy an ETF that holds the metal and takes care of the storage and insurance for it. One such product is the iShares Silver Trust (ticker: SLV) which has annual expenses of 0.5 percent, or $50 per $10,000 invested.
Another drawback is that monetary gains are taxed at the collectibles rate, Jacobs says. As with all tax issues, the details are tricky but for many investors the rate may be higher than the normal capital gains rates.
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Dig up some mining stocks. Another alternative to silver investing is to purchase silver miners.
Investing in a company tends to have better capital gains tax rates for many investors and there is also the possibility of receiving dividend payments, Jacobs says.
If you don’t want to purchase individual silver mining stocks, then consider a fund that holds many such firms. For instance, the Global X Silver Miners ETF (SIL) tracks a basket of silver mining stocks and has annual expenses of 0.65 percent or $65 per $10,000 invested.
Although buying the mining companies does solve the problem of storage and insurance costs when investing in silver bullion, there are other issues. One drawback is that silver mining companies are typically smaller than some of the household names in the equity market.
For instance, General Electric Co. (GE) has a market capitalization of around $288 billion — much larger than the $3.1 billion weighted-average market cap in the Global X ETF.
That difference in market cap will likely mean that there is more perceived risk from lenders to silver miners than there is to holding GE stock. That extra risk can make borrowing in times of strife harder for such companies.
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Silver Prices May Be Ready to Shine originally appeared on usnews.com
