Continued declines in the confidence of the U.S. dollar have led many national banks to seek out ways to reduce their exposure to the greenback. Many have opted to shift reserve holdings into hard currency, sending precious metals prices skyrocketing in recent sessions. Gold has gotten the lion’s share of the attention, as its penetration of the $1,000 per ounce mark and subsequent march towards $1,200 have prompted endless speculation on where it will settle.
But silver, the other precious metal, has outperformed gold by a wide margin this year, particularly as the dollar confidence crisis has intensified over the last five months. Silver gained 3.7% in trading on Tuesday, as investors pushed prices well above $19 per ounce. Although the metal is has now gained nearly 60% year-to-date, many investors think prices will continue to increase into 2010, with $25 per ounce an attainable target.
Investors buy gold primarily as a hedge against inflation, a falling dollar, and general economic uncertainty – its uses in industrial applications are minimal. Silver is also considered a “safe haven” investment that appreciates when inflation worries spike and Treasuries fall out of favor with major international investors. But silver is also a raw material used in the manufacture of countless everyday items, including electronics, batteries, and film. So while silver is usually mentioned along with gold, in many ways it has much more in common with copper, aluminum, and other industrial metals.
“Silver is a unique metal that wins whether the economy is going well or is in bad shape,” says Chintan Parikh according to Mineweb. “In the latter, the investor buys it as a hedge against the downturn in the economy and the markets. And if the economy improves, then the industrial demand increases.” This dichotomy helps to explain the “perfect storm” that has resulted in silver’s meteoric rise this year. Steady declines in the dollar have sent investors flocking towards precious metals, while increased optimism for a strong rebound in global manufacturing activity, particularly in emerging markets, has caused a spike in industrial demand as well.
Valuing gold – an investment that pays no dividends or coupons – is a challenge, and is perhaps much more art than science. Silver, on the other hand, is a vital component of numerous consumer goods, making predictions of supply and demand levels a more analytical analysis.
Still Room To Run?
While gold has set all time highs several times in recent weeks, silver is currently at a level touched as recently as March 2008, and remains about 8% below its all-time record. One driver of further price increases may come from the automotive sector, as demand for silver-zinc batteries, which are believed to be far more efficient than traditional lithium-ion power, could surge around the world. Silver is also used in many other “next generation” products, including plasma TVs, solar panels, and water purification applications.
Silver ETF Options
The rise of the ETF industry has made silver exposure easier to achieve than ever before. There are several silver ETFs using various strategies to deliver returns corresponding to changes in the spot price. For more actionable ETF investment ideas, sign up for our free ETF newsletter.
- iShares Silver Trust (SLV): The oldest and most popular U.S.-listed silver fund, SLV now has assets of more than $5.5 billion. Because this ETF physically buys and holds silver bars (stored in secure vaults), it generally tracks spot prices very closely. SLV charges an expense ratio of 0.50%.
- ETFS Silver Trust (SIVR): The first U.S.-listed ETF from European ETF giant ETF Securities, SIVR has seen tremendous success in its first six months of trading. This ETF, which also physically holds silver bars, has accumulated nearly $200 million in investor assets. While there a number of factors behind SIVR’s success, its much lower expense ratio (30 basis points compared to 50 for SLV) has been a major factor.
SLV and SIVR are just two out of a handful of exchange-traded products offering exposure to silver prices. For a complete guide to silver ETFs, take a look at this thorough guide.
Disclosure: No positions at time of writing.