Ways to Ride the Silver Train With ETFs: SLV, SIVR, SIL

Tony Daltorio, Investment U Research Wednesday, June 02, 2010. Silver might not get the media attention that gold does. But it still generates similar excitement in the investment world. Last year, it gained 53% in value, recording its highest average annual price since 1980, at $14.67 per ounce.

Overall, the shiny metal has done quite well for itself over the last two decades. Hitting its low of $3.51 an ounce in February 1991, it now trades at over $18. That works out to an annual gain of about 9%.

The latest World Silver Survey conducted by precious metals consultancy GFMS points to silver prices moving even higher. It foresees the commodity hitting $20 this year on industrial consumption and investment demand growing by double digits.

GFMS also points to how supplies stayed nearly flat last year at 889 million ounces. Mining output did rise 3.6% to nearly 710 million ounces. But overall, supplies didn’t budge due to lower scraps flows and government sales dropping 86% to just 20.2 million ounces.

This year, mine production is expected to increase modestly. But GFMS expects further scrap and government supply reductions to offset the increase in supplies from mines, leading to little overall change in supplies.

Industrial Demand for Shiny Silver

Silver isn’t just a pretty metal for jewelry. Nor is it something investors simply hold onto during tough times. It actually has a number of commercial and industrial uses. That includes in the automotive, solar power, photography and jewelry industries.

And scientists are still discovering new ways to use it in industrial applications. Silver oxide batteries, silver conductive inks in electronics and silver nano-technologies in medical applications are all gaining traction in their various markets.

Last year, hankering for silver jewelry stayed put at 157 million ounces. Meanwhile, the economic slowdown drove industrial demand down 21% to 352 million ounces.

That sharp drop from late 2008 through early 2009 hit silver prices badly. Eroding a decade of sustained gains, the metal hit $8.42 an ounce in December 2008.

However, as 2009 progressed, so did the commodity. And as GFMS noted, that has continued into 2010, largely thanks to China. The Asian nation accounts for about 70% of the world’s total industrial usage of silver.

Investors Can’t Get Enough Silver

Despite last year’s 283.7 million ounce surplus, silver still surged. That surplus didn’t matter much as investors picked up the slack from other demand sources.

Some of silver’s rise comes from speculators betting on an economic recovery and increased demand. But on the flipside, the financial crisis has also driven investors to the metal as safe haven asset. Coins and physically backed ETFs have done especially well in the market.

In fact, investments currently comprise a quarter of silver demand, a level not seen since the 1970s.

Net investment in silver surged last year to nearly 137 million ounces, up an incredible 184% from 2008. ETF holdings of the same rose 132.5 million ounces over 2009, ending at nearly 398 million. And coin demand surged 20.7% to 78.7 million ounces.

Despite another indefinite surplus this year, investors appear more than willing to continue buying.

GFMS forecasts that silver investment demand will remain strong this year “given the scope for the sovereign debt crisis to widen and the probability that real interest rates will remain low or negative in all the major currencies for some time.”

How To Play The Silver Train

Silver is most definitely in a sweet spot right now. It is enjoying increased industrial demand from a recovering global economy. And at the same, it’s reaping the benefits of investor worries over sovereign debt and economic conditions at the same time.

But its future remains unclear, as bears are quick to point out. After all, either industrial demand or investor demand eventually has to outweigh the other. The global recovery could stall, hitting industrial demand. Or the financial crisis will ease, prompting investors to sell out from their silver safe haven.

Most likely, any economic recovery will damage investor demand more than it raises industrial needs. So silver investors need the economy to continue staggering in order to hold onto their gains.

Fortunately for them, it doesn’t look as if the sovereign debt problems will disappear anytime soon. And the longer it drags on, the longer the Federal Reserve will likely keep interest rates near zero.

That creates a very positive environment for silver bulls, who have several options to choose from.

ETFs fans can pick from a few different physically backed options. That includes the iShares Silver Trust Fund (NYSE: SLV) and ETFS Physical Silver Shares ETF (NYSE: SIVR).

Or, the fairly new Global X Silver Miners ETF (NYSE: SIL) follows global silver mining companies.

And investors can always buy into individual mining companies directly. Silver Wheaton (NYSE: SLW), Silver Standard Resources (NASDAQ: SSRI) and Pan American Silver (NASDAQ: PAAS) all present worthwhile opportunities.

Good investing,

Tony Daltorio

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