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Is Silver the new Gold?

According to the April 7, 2011 Reuters article entitled, “Silver defies bears to target $40/oz and beyond” Silver is the top performing previous metal thus far in 2011, rising by more than 29% during the first quarter of the New Year.  In contrast, Gold has risen approximately 2.8% over the same timeframe.  Silver, in fact, is now close to $40 an ounce, which is the highest level this commodity has traded at in 31 years.   Some analysts are even forecasting Silver prices to top $50 an ounce by the end of this year.

blog post 20110408 Chart 1

Source:  Kitco® Metals Inc., April 7, 2011

While Gold has been the precious metal commodity story of the past few years and Palladium was the precious metal commodity story of the year in 2010, Silver is clearly the precious metal commodity story of the year-to-date in 2011 for many of the same reasons that led to the dramatic recent increases in the price of Gold and Palladium, in addition to a couple of new Silver specific reasons.   These reasons include:

  1. Silver has more industrialized applications, particularly in the electronics sector, than Gold
  2. Increased industrial demand for Silver in emerging market countries throughout the world
  3. Inflationary concerns and perceptions that precious metal based commodities can serve as inflation hedges within a portfolio
  4. Increased global uncertainty with respect to the economic recovery and bull market continuation due to civil unrest in the middle-east (Ex. Libya and Egypt), natural disasters in Japan and sovereign debt default concerns in the P.I.I.G.S. (Portugal, Italy, Ireland, Greece and Spain) countries
  5. Opinion of many investors that Silver is a more affordable metal commodity inflation hedge than Gold, although this opinion may be starting to change

The evolution of the Exchange-traded Product (ETP) market, which has made commodity investing more convenient for individual investors, has also fueled the rise in the price of Silver as it has fueled the rise in the price of other commodities, sparking some to question if there is enough supply of Silver to meet investor and industrial demand.  To this end, the same previously cited Reuters article cited that, Flows into silver exchange-traded funds (ETFs), which issue securities backed by physical metal, are worth about $360 million so far this year.”

However, we, at Hennion & Walsh, feel strongly that, as with other security types, investors should educate themselves on the intricacies of the ETP marketplace, and consult a professional advisor as appropriate, prior to making any investment decisions regarding commodity investments.   Some factors to consider when reviewing Silver ETPs include, but are not limited to:

a)      Whether the ETP in question is physically backed by Silver (i.e. are silver bars actually stored in vaults that are audited regularly)

b)      Whether the ETP in question is based on futures contract which can introduce tracking error related issues such as contango (i.e. when futures prices are higher than spot prices) and backwardation (i.e. when futures prices are lower than spot prices)

c)       The tax treatment, and potential issuer risk involved, based on the structure of the ETP in question

d)      The expense ratio, relative to its peers, of the ETP in question

ETPs are also available that allow investors to invest in a basket of Silver mining companies or a basket of precious metals based commodities – including Silver.

In our opinion, commodity investments, which have historically been volatile in general, should not be looked at as a stand-alone investment but rather only considered as a part of diversified portfolio that is aligned with an investor’s goals, investment timeframe and appetite for risk.