The Curious Case of Silver ETFs

by on July 16, 2013 | ETFs Mentioned:

When it comes to commodity investing, there is little doubt that silver is among the most popular options out there. With the iShares Silver Trust (SLV, B-) being the third largest commodity ETF by assets and the second most actively traded, there’s no denying a high demand for the white metal. But silver has a unique makeup unlike any other commodity; while that has sometimes been a blessing for the precious metal, it has been something of a burden as of late [for more ETF news and analysis subscribe to our free newsletter].

Silver ETFs Caught In A Pickle 

Of the four precious metals, silver and gold are often thought of as safe haven metals, while platinum and palladium typically fall under the industrial side of the equation. Silver, however, also has a fair amount of industrial purposes, allowing it to be categorized as both a safe-haven and an industrial resource. Currently, just 6% of silver is used for investment while the vast majority (near 40%) goes to industrial uses, a third to jewelry, and the rest to photographic uses.

SilverUnfortunately, with a metal that is unable to make up its mind as to which category it will definitively fall under, silver has been caught between the two and paying a harsh price. For the time being, silver and gold have lost their safe haven appeal, with silver down 59% from its 2011 highs. Many predicted silver to take off as Fed easing would spark inflation and create a high investment demand, but this trend has yet to manifest itself [see also 25 Ways To Invest In Silver].

On the other side of the equation, the industrial world has not picked up enough to give silver the boost it needs. While the economy is certainly back on track, the demand for silver has yet to alleviate prices and the metal keeps taking hits. Silver is down approximately 35% YTD and is the worst-performing major commodity of the year. In the middle of something of an identity crisis, silver needs to either regain its safe-haven appeal, or for demand from the industrial sector to jump enough to bottom out prices.

Investors Still Have Faith

Despite silver’s abysmal performance over the last two years, many still believe the metal has more to offer. Where the SPDR Gold Trust (GLD, A-) has lost over $19 billion in assets this year, SLV has managed to rake in $200 million – a stark contrast. For any investor looking to buy in on the cheap, SLV is at its lowest point since the latter half of 2010, which may be one of the reasons that investors are still willing to put money into a fund that has performed so poorly this year.

One thing is for sure, when silver does regain its identity as either the safe haven or an industrial bellwether, it will likely already be too late from an investing standpoint. Those who feel that silver’s long-term potential outweighs its current volatility should consider an entry point as prices remain depressed.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.