Investors Seeking to Hedge against Inflation Look to Silver

- June 17th, 2010

Fearing the rise of inflation due to the reluctance of central banks to change historically low interest rates, investors are looking to silver. This practical guide shows newbie investors how to enter the silver market in all forms, either in bullion, ETFs, futures contracts, or through direct investment in mining companies.

By Michael Montgomery—Exclusive to Silver Investing News

globalInvestors seeking to protect their portfolios from inflation are looking to silver and gold as a safe bet. Due to ever-mounting concerns over European debt issues as well as a slower than expected recovery, the US Federal Reserve is unlikely to raise the interest rate till mid-2011. With the prospect that Spain may follow in Greece’s footsteps, more uncertainty is on the horizon.

“Fears that contagion from euro zone debt problems might again push the world into a crisis akin to that seen in 2008 also came into play in the forecasts the U.S. central bank. The survey of over 90 economists, taken in the past week, suggests the U.S. central bank will maintain interest rates at the current ultra-low level near zero for some time and then hike to 0.5 percent in the first three months of 2011,” reports Chris Reese, of Reuters.

If the Federal Reserve decides to leave the interest rate unchanged, the fear is inflation will begin to rise dramatically over the next year. The fears may entice many investors to increase their positions with silver and gold, driving the price higher. Gold Investing News reporter Melissa Pistilli recently covered the topic of coming inflation and its impact on gold prices. Silver and gold prices traditionally move together and a look at the gold-silver ratio shows silver still has farther to go to catch up with gold. “The average gold-silver ratio is 52, but the ratio is currently around 63, so silver has some catching up to do,” stated Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management.

Investing in Silver

Physical Silver (Bullion)

One way to invest in the silver market is to buy bullion bars, or silver coins. Both silver coins and bars are priced according to weight and purity and usually cost more than spot prices, however, bars always have lower premiums than coins. A few of the most common ways to purchase physical silver are the United States Mint Silver Eagle coins, Canadian Silver Maple Leaf coins, and Credit Suisse Silver Bullion Bars.

Exchange-Traded Funds (ETFs)

Exchange-traded funds are bought and sold like stocks, and usually represent a physical holding of the precious metal by the fund. ETFs are convenient because the investor can gain access to physical silver without the hassle of having to store bars or coins. Other ETFs like Powershares DB Silver Fund holds silver futures contracts. A few ETFs worth considering are:

iShares Silver Trust [NYSE:SLV]

This physically backed ETF has liquidity due to large trading volumes. “The elder of the two funds has been available to investors since 2006 and boasts over $5.5 billion in AUM. The fund is liquid, changing hands 11 million times per day,” according to Don Dion, of The Street.

ETFS Physical Silver Shares [NYSE:SIVR]

“SIVR became available in the second half of 2009. Since its launch, the fund has gained a following, changing hands over 150 thousand times per day and bringing in nearly $150 million,” says Dion.

PowerShares DB Silver Fund [NYSE:DBS]

Powershares Fund is a silver futures based fund that seeks to protect investors from price shortfalls. However, investors haven’t shown the same interest as with other physically backed shares, average trading volumes are around 30,000.  “DBS utilizes an optimum-yield investing strategy which attempts to protect against falls when silver futures are in contango and take advantage of the benefits that come when futures are in backwardation,” Dion explains.

Silver Futures

Futures contracts are a binding agreement to purchase a stated quantity of metal at an agreed price on a future date. The contracts feature a standardize quality, quantity, date and place of delivery. Investors can choose either a Long Buy position or Short Sell position. Silver is purchased through either a ‘Big’ contract (5,000 ounces) or a ‘Mini’ contract (1,000 ounces) at a given price.

A hedger would take a position that is the opposite from their physical holding of silver to offset risk. A gain in one offsets the losses or risk in the other. A speculator on the other hand would try to profit off of market risk either in the “Short Sell,” assuming silver price will drop, and a “Long Buy” assuming the price will rise profiting from the sale of the physical silver.

Investors should be fully aware of the risks involved in futures contracts. Significant profits can be made. However, the risks associated with these contracts, due to their size, and the volatility of the market are substantial and should be left to traders who have considerable expertise in the field.

Mining Company Stocks

Another option to investing in silver is purchasing shares in individual mining companies. This indirect investment approach to the silver market can be high risk due to individual company performance, management decisions, market fluctuation, political risk, viability of the projects and numerous other factors. Because almost all of the companies also mine other metals along with silver, performance of the company is not necessarily corollary to silver price alone. However, with a little due diligence into researching management and the projects, significant profits can be had in this sector.

One company to consider is Silver Wheaton Corp. [NYSE:SLW]. While not an actual mining company, Silver Wheaton offers a great way to gain exposure to the silver mining market without the inherent risks of owning stock in a mining firm.

Silver Wheaton Corp is the largest metals steaming company in the world. This year it expects to produce 20,000 ounces of gold and 22.2 million ounces of silver. The company operates mines in Mexico, Peru, Sweden, Portugal, Greece, Chile, Argentina, and the United States. Its share price has been rising steadily this year, posting further gains this week along with rising silver prices.

The firm has recently signed an agreement with Ventana Gold Corp. [TSE:VEN] for a $20.7 million private placement. Under the agreement, “The transaction is comprised of 1.8 million units at a price of $11.50 per unit for gross proceeds of $20.7 million. Each unit is comprised of one common share and one-half of one common share purchase warrant, with each warrant entitling Silver Wheaton to purchase one common share of Ventana at a price of $15.00 until June 7, 2011,” stated the press release.

Ventana Gold is using the proceeds from the agreement to fund further exploration on their La Bodega and Cal-Vetas projects in Columbia. The company may also use the proceeds for the prepayment of debt financing.

Ventana Gold has also announced drill results on the La Mascota zone, part of the La Bodega gold project in Colombia. “Infill drilling at La Mascota continues to return excellent results… returning a 50 metre intercept grading 6.25 grams per tonne gold and 29.75 grams per tonne silver, and hole 233 on section 9750E returning an 11 metre intercept grading 13.98 grams per tonne gold and 107.17 grams per tonne silver,” according to the press release.

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