Posted on Saturday, July 9th, 2011 | In Market Commentary
[Silver is] a popular investable asset, attracting investors from around the world thanks to its numerous industrial applications as well as its traditional role as a store of value and an inflation hedge. There are a number of different options for investing in silver, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and both physically-backed and futures-based ETFs and ETNs. Investors also have the option of buying coins or bars of the metal in order to obtain physical exposure. [Let's discuss the merits of investing in silver and review what the options are.] Words: 2319
So says Eric Dutram (www.CommodityHQ.com) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Dutram goes on to say:
Physical Properties and Uses of Silver
Silver is a very malleable and ductile metal, prized not only for its hardness but for its brilliant white shine. Furthermore, the metal has the highest electrical conductivity and the highest thermal conductivity of all the metals. This combination ensures that silver finds its way into a multitude of uses ranging from jewelry and coins to medicine and electrical wiring.
While the photographic segment of silver demand may be waning, silver’s use in photovoltaic cells in solar panels are becoming extremely important to the silver industry. This is especially true since the world is beginning to rapidly shift toward alternative fuel sources and silver remains a relatively cheap and quality metal in the photovoltaic process. This comes at a great time for the solar industry since the photographic uses are beginning to decline quickly thanks to the advent and now widespread use of digital photographic methods. As digital photographs take off in emerging markets, demand for silver is likely to be limited. However, given the multitude of other uses for silver in the technological and medical fields it remains to be seen if this will impact the price or if things will even out for the industry.
Silver Supply and Demand
Currently, just 6% of silver is used for investment while the vast majority (near 40%) goes to industrial uses, 33% to jewelry, and the rest to photographic uses. This breakdown shows that unlike gold, silver has a wide number of uses and that large purchases by investors, or more widespread use of ETFs, will likely have a minimal impact on the marketplace and the overall supply and demand picture.
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Demand for silver has soared over the last several decades as emerging markets continue to grow and require more silver for electrical, medical and ornamental purposes. The Andean region of South America, which includes Chile, Bolivia and Peru, is the most active silver producing region in the world, accounting for close to one-third of global supplies in recent years. The three nations also make up close to 40% of known reserves ensuring that these countries dominate the discussion of silver prices. Because of this concentration of production, supply disruptions in the region have the potential to move prices sharply. Mine strikes, natural disasters, or spikes in geopolitical tensions in the region often send global silver prices higher in the short-term.
Below is a table highlighting some of the biggest producing countries as well as their known reserves of the precious metal (all data in metric tons):
|Country||2009 Production||2010 Production||Reserves|
|U.S.||1,250||1,280 (5.7%)||25,000 (4.9%)|
|Australia||1,630 (7.5%)||1,700 (7.7%)||69,000 (13.5%)|
|Chile||1,300||1,500 (6.7%)||70,000 (13.7%)|
|China||2,900 (13.3%)||3,000 (13.5%)||43,000|
|Mexico||3,550 (16.3%)||3,500 (15.7%)||37,000|
|Peru||3,850 (17.7%)||4,000 (18.0%)||120,000 (23.5%)|
Below is a list of the world’s top 10 silver producing companies in 2009. While many of these companies have high levels of output, it is important to remember that many of them do not exclusively focus on silver and thus may not be the best “pure play” on silver prices. With that being said, we have put an asterisk next to the companies that have been identified as “primary silver producers.” (All figures are in millions of ounces).
|BHP Billiton (BHP)||Australia||42.0|
|KGHM Polska Miedz (KGHPF.PK)||Poland||38.7|
|Fresnillo PLC* (FNLPF.PK)||Mexico||37.9|
|Pan American Silver* (PAAS)||Canada||23.0|
|Cia Minera Volcan||Peru||21.2|
|Hochschild Mining (HCHDF.PK)||Peru||18.8|
|Coeur d’Alene Miners Corp* (CDE)||USA||17.7|
|Kazakhmys plc (KZMYY.PK)||Kazakhstan||16.9|
|Data from silver institute|
Although silver is by far the cheapest of the precious metals on a per ounce basis, steps are always being made to replace the metal with cheaper counterparts. In the film industry in particular, strides are being made to reduce silver usage across the board. Film with reduced silver content, silverless black-and-white film, and xerography (a photocopying method) substitute for silver that has traditionally been used in black-and-white as well as color printing applications are currently the most popular applications. In the medical space, surgical pins and plates may be made with tantalum and titanium in place of silver, although the cost effectiveness of this process may become questionable if titanium and tantalum prices rise. Another major silver dependent industry that has seen huge inroads in recent years has been in the “silverware” segment where stainless steel may be substituted for silver flatware. Germanium can also be added to this compound in order to make the flatware tarnish resistant. Lastly, aluminum and rhodium are being used to replace silver that was traditionally used in mirrors and other reflecting surfaces, achieving great cost savings in the process.
As a global commodity, the price of silver is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of silver include:
- Emerging Market Demand: Silver demand has surged in recent years thanks to rising wealth levels in emerging markets across the globe. This increase in income has allowed consumers to buy up more jewelry, silverware and other status symbols, helping to boost the price of the precious metal.
- Inflation/Currency Issues: Silver is seen as an inflation hedge and has been a store of money for centuries. If the people of the world lose faith in fiat currencies, it will likely be gold and silver that benefit. While gold often steals the show, silver is more volatile, meaning that while it leads on the downside it also leads on the upside as well. Furthermore, since silver is less than 1/40th the price of gold, it remains an obtainable goal for many people in poorer countries around the world, suggesting that demand could be lifted by those without the resources to buy gold but are still looking for an inflation hedge.
- Photography Industry: Silver is extremely important to the photography industry where in 2009 usage hit 160 tons, down from just under 190 tonnes in 2000. If this downward trend continues it could put significant pressure on the industry but then again, thanks to the metal’s near 99% recycling rate out of photographic film, this might not be such a negative after all.
- Supply Disruptions: Because a significant portion of global supplies come from South America, supply disruptions in the region can have a major bearing on global prices. Strikes at major silver producing mines are relatively common, and natural disasters – such as earthquakes or landslides – occur from time to time as well.
- Use of Substitutes: Technological advancements have made possible substitution of cheaper metals in certain applications. For example, aluminum and rhodium are replacing silver in mirrors and other reflective surfaces, stainless steel is replacing silver in flatware and the move toward digital photography has hurt silver demand as well. However, this substitution trend can work both ways; many are experimenting with using silver in place of platinum or palladium in numerous applications due to its drastically cheaper price per ounce. If these substitutions in favor of silver outweigh the negatives, the substitution process could be a net benefit for the white metal.
Investing in Silver
Silver has appeal as an investable asset for several reasons. First, the metal has been a store of value for thousands of years and it is widely recognized the world over. The metal also has the potential to act as an inflation hedge, appreciating in value when prices broadly rise. Furthermore, unlike the rest of the precious metals group, silver is widely used both in the investment world and in the industrial one, suggesting that it may be a more balanced, but volatile, play than gold, platinum or palladium.
Options for investing in physical silver are numerous to say the least. Due to the product’s relatively low price, wide number of uses and resistance to corrosion, silver coins, “rounds” and bars are very popular among many investors. Several countries mint coins, the following is a list of the most popular issuers:
In addition to these coins, investors have the option to buy bars in various denominations ranging from one ounce up to 100oz. bars and beyond. Investors also have the option to buy old U.S. coins which have high levels of silver…
Silver futures are traded on the Chicago Mercantile Exchange under the product symbol SI. The contracts are quotes in U.S. cents per troy ounce [see reference to article on exactly what a troy ounce is here (2)] and each contract represents 5,000 troy ounces. Trading terminates on the third last business day of the delivery month and trading is conducted for delivery during the current calendar month; the next two calendar months; any January, March, May, and September falling within a 23-month period; and any July and December falling within a 60-month period beginning with the current month. Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month. Trading terminates on the third-to-last business day of the delivery month. Trading at settlement is allowed in the active contract months of May, May, July, September and December. Silver futures are subject to NYMEX position limits.
Investors can also obtain exposure to silver by purchasing stocks [and warrants - see here (3) for specific details] of companies that are engaged in extracting and selling the metal. Like most companies, the profitability of silver miners depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when natural resource prices are elevated – especially if significant portions of the cost structure are fixed in nature. Mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.
Many of the largest mining companies are engaged in the extraction of a variety of resources, including various precious and base metals. There are, however, a number of “pure play” mining companies and firms whose primary focus is silver:
- Silver Wheaton Corp
- Fresnillo PLC
- Pan American Silver Corp.
There are multiple ETFs offering exposure to silver as well, including funds that invest in futures contracts, the physical metal, and funds that invest in stocks of mining companies. Additionally, investors have exposure to the short side of silver via the ProShares UltraShort Silver Fund. For exposure to the physical metal, two choices exist:
- iShares Silver Trust (SLV) [read this article (4) for comments]
- ETF Securities Physical Silver Shares (SIVR)
If an investor is looking for futures exposure the following two ETNs are quality choices:
- PowerShares DB Silver Fund
- UBS E-TRACS CMCI Silver TR ETN
Lastly, for investors seeking leveraged exposure to the white metal, the ProShares Ultra Silver Fund offers 2x exposure to the price of silver.
As mentioned above, the Andean nations of South America are among the largest producers of silver. While the economies of these countries have become increasingly diversified in recent years, there is still a link between prices of silver and economic strength. As such, the following country-specific and region-specific ETFs may also be impacted by the price of silver:
- iShares MSCI Peru Index Fund
- iShares MSCI Mexico Index Fund
- Global X FTSE Andean 40 ETF
Titles and Links to Articles Referenced Above:
- Number of Canadian and American Silver Bullion Coins Exploding http://www.munknee.com/2011/07/number-of-canadian-and-american-silver-bullion-coins-exploding/
- What’s the Difference Between 1 Gold Karat, 1 Diamond Carat and 1 Troy Ounce? http://www.munknee.com/2011/03/whats-the-difference-between-1-gold-karat-1-diamond-carat-and-1-troy-ounce/
- The “Secret” World of Gold & Silver Company Warrants http://www.munknee.com/2011/05/the-secret-world-of-gold-silver-company-warrants
- All Gold and Silver ETFs are NOT Created Equal! Here’s the Best http://www.munknee.com/2011/05/all-gold-and-silver-etfs-are-not-created-equal-heres-the-best/
Other Related Articles:
- Don’t Delay: Get Your Fair Share of Silver Today! Here’s Why
- Sprott: Shocking Shenanigans in Paper vs. Physical Silver Market http://www.munknee.com/2011/07/sprott-shocking-shenanigans-in-paper-vs-physical-silver-market/
- Think You Know All About Silver? Take This Quiz and Find Out http://www.munknee.com/2011/06/think-you-know-all-about-silver-take-this-quiz-and-find-out/
- How to “Play” a Parabolic Move in Silver http://www.munknee.com/2011/04/how-to-play-a-parabolic-move-in-silver/
- Silver is Now Even More Precious Than Gold! Do You Own Any? http://www.munknee.com/2011/03/silver-is-now-rarer-than-gold-do-you-own-any/
- It Is Time To Embrace the New Refrain “Got Silver?” http://www.munknee.com/2011/02/the-coming-silver-supernova/
- Silver Is About As Close As You Can Get To A Sure Bet! Here’s Why http://www.munknee.com/2011/01/silver-is-about-as-close-as-you-can-get-to-a-sure-bet-heres-why/
- Panic Before the Herd and Win-Win with Silver! http://www.munknee.com/2011/01/panic-before-the-herd-and-win-win-with-silver/
- World’s Silver Production By Country – And Much More! http://www.munknee.com/2010/12/worlds-silver-production-by-country-and-much-more/
- Why You Should Own Some Silver – As Well As Gold http://www.munknee.com/2010/11/why-you-should-own-some-silver-as-well-as-gold/
- Why Silver at $398.52 is a Realistic Parabolic Peak Price http://www.munknee.com/2011/05/silver/
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Lorimer Wilson is Editor of FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial writer. He is also a frequent contributor to this site and can be reached at email@example.com