Special Report: How To Buy Silver (SLV, SIVR, JPM, CEF)

As precious metals go, silver may not have quite the same mystique as gold. But let’s be honest: The “white metal” has its backers, too. In fact, when Money Morning published its “How to Buy Gold” special report just a few weeks ago, one of the biggest questions that we received in response was: “When can you do the same for silver?”

That’s just what we’ve done here. In this special report, we show you how to buy silver.

Silver: The “Other” Precious Metal

Although gold possesses the greatest allure of precious metals, silver has a longstanding tradition in many cultures – a tradition that in some cases reaches back thousands of years. Nearly 2,500 years ago, for instance, China was the first to use silver as money.

Here in the United States, silver alloys were still present in some of our everyday coins as recently as 40 years ago. Today, however, silver is no longer viewed that much as a monetary metal. But that’s because about 40% of silver is used for industrial applications.

The physical silver market is small, with annual demand of slightly less than 900 million ounces.

Silver prices are volatile – on the upside and the downside. It set a bull-to-date high of near $21 in early 2008. The global financial crisis tipped silver prices into a near-freefall: They declined by more than 50% to drop into the $9 range later that year.

Since that financial-crisis nadir, silver prices have more than doubled to reach nearly $19.40 an ounce.

An important metric to understand and watch is the silver-to-gold ratio. It tells you how many ounces of silver it takes to buy one of gold. Historically, that ratio is 16 to 1. On this basis alone, silver should be at $77 right now. That’s a long way from $19.

But perhaps a more realistic level, at least in the short term, is the ratio of silver-to-gold since the start of this bull market back in 2000. That ratio has been about 50-55 ounces of silver for one of gold. With gold at $1,200, that implies a silver price of $22-$24 an ounce – a return of as much as 25% from current price levels.

How to Buy Silver

Like gold, silver investments can be made in a variety of forms. Let’s take a look at some of the most popular forms.

Physical Silver: Physical silver can be purchased in a variety of sizes and weights, which determines its price. Most typical are 1.0 ounce silver coins, like the Austrian Silver Philharmonic, the American Silver Eagle, and the Canadian Silver Maple.

Their prices vary slightly due to differences in silver purity, with the Silver Maple being the highest at 99.99% pure. You’ll pay about a 16% premium over the silver price for coins due to the cost of fabricating them.

Another popular option is the 100-ounce silver bar, which commands a 5% premium over the spot price of silver, meaning the bar is currently selling for slightly more than $1,900.

These coins and bars are essentially bought for their silver content and not as collectibles. If you’re looking to build a silver stash – either large or small – bullion dealers may be the easiest way for investors to do so. But do your homework first, and check them out before you buy. Also, avoid paying more than the premiums I noted above for either coins or bars.

Some investors wonder if they should buy smaller denominations, like 1/20th, 1/10th, ¼, or ½ ounce (gold) coins. The thinking goes like this: If ever these coins need to be used to transact and make payments, one would want to have smaller “amounts” to carry around. That’s a valid rationale. Even so, keep in mind that you’ll pay a premium to the actual silver content, since each individual coin has to be fabricated. I believe that, should we ever get to that point, you could just convert a one-ounce coin or bar into a number of smaller coins, and pay the premium, or perhaps receive whatever else is being used for transactions (a new currency?) in return.

A few dealers that have an established reputation are:

Exhange-Traded Funds (ETFs) and Certificates: Another option for silver ownership is through exchange-traded funds (ETFs) or certificates.

As I mentioned in the “How to Buy Gold” special report, ETFs are a convenient way to establish a claim on gold, and the same applies to silver. A simple way to acquire a claim on silver is to buy units of the iShares Silver Trust ETF (NYSE: SLV). With some $5.5 billion in assets, SLV is the world’s largest silver-backed ETF, using JPMorgan Chase & Co. (NYSE: JPM) in London as its custodian. SLV shares, which represent approximately 1.0 silver ounce each, are easy to buy and sell through your brokerage account.

You can also acquire “paper silver” through Perth Mint Certificates(PMC). Vault-protected and insured, PMC offers the only government-backed bullion storage program on an allocated or unallocated basis [this means stored separately for you (allocated), or stored along with everyone else’s (unallocated)].

In an “allocated” situation, your coins or bars are removed from the mint’s operating inventory, and placed in the Perth Mint Depository vault with your own account number. Allocated metals are not part of the mint’s balance sheet, so you will pay storage fees. The government of the state of Western Australia guarantees the certificate.

Minimums are USD $10,000 for your initial PMC purchase, with subsequent purchases at the USD $5,000 minimum level. If you hold your coins, bars, and bullion on an unallocated basis, they can be converted into specific coins or bars and you can then take delivery, if you wish. The Perth Mint Certificate program is a solid way to gain international diversification for your silver holdings. For more information, check out Perthmint.com (note that Kitco and Asset Strategies also offer PMCs).

(The Perth Mint was established in 1899 when Britain’s Royal Mint built a series of branch mints. These branches were set up in places throughout the British Empire where gold was found, eliminating the need to ship gold back to England to fabricate coins that would then have to be distributed back through the Empire.)

As I noted in my “How to Buy Gold” article, “paper” gold is not the same as “physical” gold. This contrast holds true for silver, as well. Despite the Western Australia government backing and long history, you have to realize that with PMCs you’re still relying on someone else’s promise. By contrast, with physical silver under your control, you’ve eliminated any counterparty risk.

Confiscation Fears

The escalating interest in precious metals brought about by the rapidly accelerating fears about the U.S. economic outlook has brought about a real increase in worries of gold-and-silver confiscation.

Back in 1933, in the depths of the Great Depression, U.S. President Franklin D. Roosevelt signed Executive Order 6102, effectively forbidding the ownership of gold coins, bullion, and certificates by U.S. citizens. This coerced the public to turn in their gold for $20.67 an ounce, which the government shortly thereafter “revalued” to $35 per ounce. What’s especially interesting about EO 6102 is the absence of any mention of silver.

Now we can’t know if there will ever again be anything akin to this Oval Office edict – much less what it might cover and might say. But going on the past, and considering the size of the silver market relative to gold, silver may be a way to own a precious metal that just might sidestep any risk of future confiscation.

However, if the government getting its hands on your hard-earned silver is a personal concern, then you may want to consider a particular kind of silver investment. One option may be to own silver that’s held outside of your country of residence.

As I mentioned in the “How to Buy Gold” article, one example of this for U.S. residents would be the Central Fund of Canada Ltd. (AMEX:CEF). It’s a closed-end fund that owns physical gold and silver, and that’s been around since 1961. It’s domiciled in Canada, with its precious metals stored in the vaults of a Canadian-chartered bank. CEF often trades above its net asset value (NAV), but you should avoid paying more than a 5% premium. See www.centralfund.com for more information.

But my favorite “silver-only” fund is the ETFS Physical Silver Shares (NYSE:SIVR). Issuer ETF Securities Ltd. is one of the largest ETF providers in Europe, with some $16 billion under management. Each unit is about the equivalent of 1.0 ounces of silver in U.S. dollars. As well, it seems to trade with a net asset value that boasts almost no premium or discount, and management fees are reasonably low, around 0.45 % annually. The company indicates that the physical silver that backs the units is held in a vault in London.

As I’ve said before, there’s no substitute for having some physical precious metals stored under your own direct control. And even the SIVR silver ETF shares are a paper claim on silver. But it does add another dimension to your precious-metals holdings, and accomplishes that with storage in another jurisdiction.

Actions to Take: The potential ravages of sustained inflation or deflation should be of great concern for serious investors.

Don’t get caught up in the minutiae of precious-metals investing – such as the potential for Executive Order confiscations, or the fine points of paper claims on precious metals.

If silver and gold aren’t already part of your portfolio, or if you feel that you don’t own enough yet, what is important is that you get out there and add several forms of each precious metal to your portfolio.

It will help you sleep better.

Look at “physical” silver – either coins, bars, or both – as well as such “paper-silver” investments as exchange-traded funds (ETFs) or Perth Mint Certificates (PMCs). You might also want to consider a closed-end fund, such as the Central Fund of Canada Ltd. (AMEX:CEF), a closed-end fund that’s been around for nearly 50 years and that holds both physical gold and silver.

Finally, in all your purchases, pay attention to costs – whether we’re talking about fund management fees or dealer premiums in excess of a metal’s market price, those costs can negate any benefit you’ve tried to establish.

Watch for an upcoming feature on the new Form 1099 rules and how they will affect your precious-metals holdings. And if you have follow-up questions, please feel free to send them to the “Money Morning Mailbag” at [email protected].

[Editor’s Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada – to be closer to the action. And several of his recent predictions have generated a genuine Internet buzz.

To find out more about commodities, or the Global Resource Alert, please click here.]

 

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