Don’t ask for whom the silver bell tolls. It tolls for thee.
Okay, I need to brush up on my Hemingway—maybe a trip to Key West to get away from the snow would do the trick—but you get the picture.
Silver is an appealing commodity these days. As Bloomberg.com noted yesterday, silver is posting its biggest discount to gold in 13 years, making it the "poor man’s gold." That’s something that caught my eye because we all feel like poor men these days. So I figured it’s high time we gave silver the Cramer treatment.
Why silver? Ever since silver was discovered near Acapulco in 1524 (only three years after Cortez brutalized the Aztecs in 1521, and helped himself to their gold), the shiny stuff has triggered limited but enthusiastic appeal among investors.
Like I’ve said before, investors turn to commodities like silver and gold when the stock market goes south.
That’s been the case so far in 2009. As the figures below indicate, silver has risen in trading value by almost 15%, compared to 6.3% for gold (which gets all the headlines) and -22.4% for the S&P 500, which continues to plummet in the aftermath of the federal government’s $1 trillion porkulus plan.
Dec. 31, 2008: 869.75
March 2, 2009: 925.00
Change: 55.25 (6.35%)
Dec. 31: 10.79
March 2: 12.40
Change: 1.61 (14.92%)
Dec. 31: 898.00
March 2: 1,053.00
Change: 155.00 (17.26%)
Dec. 31: 903.25
March 2: 700.82
Change: -202.43 (-22.41%)
Also, since last October, when the pork hit the fan, so to speak, silver has also outperformed gold as measured by the two commodities’ main exchange-traded funds, Gold SPDR Gold Trust ETF (Stock Quote: GLD) and I-Shares Silver ETF (Stock Quote: SLV). GLD has been up about 15% since mid-October, 2008, while silver has risen by roughly 25%—not a bad bet for silver investors.
I’m just warming up. If you invested in silver in 2000, at the vortex of the last big bear market, by the end of 2008 you'd have earned a 240% return on your investment, compared to 190% for gold investors and just 35% for the Standard & Poor’s over the same time period.
Let’s be fair. Gold has continued an uninterrupted eight-year run of steady growth, while silver can’t say the same. But the rampant interest in gold has left some wiggle room for investors looking to cash in on silver, hence the discount to historical levels not seen for 13 years.
So I like silver. It can’t hurt to consider some for your portfolio. Why? Well, besides the upside in performance, we’re in a commodities bull market and I think silver has more room for growth than gold. There’s a lot of steam left in the precious metals market, so that scenario shouldn’t change anytime soon. That’s especially pertinent given the spenda-palooza going on in Washington. With all the bailouts and stimulus cash being flung around, mostly to political special interest groups, inflation is soon to follow. Silver, like gold, is a great hedge against inflation, so the opportunity to get in on silver while there is still room for growth is a pretty good deal.
As Warren Buffett said in his annual Berkshire Hathaway letter to shareholders, “These once unthinkable dosages will almost certainly bring on unwelcome afterthoughts. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.” Buffett’s had a tough run here but count me as with him, not against him.
So how do you make your silver play? I already mentioned the Silver ETF, which is a quick and easy way to get in the game. There’s also PowerShares DB Silver (Stock Quote: DBS), a tracking stock. But everyone I know simply uses the ETF because it has tracked silver perfectly, so that's a strong option.
I like a few silver stocks, too, especially Silver Wheaton (Stock Quote: SLW), which is the 100% pure silver play, and Pan American Silver (Stock Quote: PAAS), which has the best growth prospects. That said, it always seems overvalued to me because of the speculators who pile into it as the “growth precious metal,” not unlike Yamana (Stock Quote: AUY) for gold. In truth, no silver stock is as good as, say, Agnico Eagle (Stock Quote: AEM) or El Dorado (Stock Quote: EGO) for gold.
The top mining countries include the U.S. and Canada, but Mexico and Peru are big silver countries as well. I like the stability of silver stocks in the solid, more established bourses, so you might want to stick to silver companies here in the U.S and up in Canada.
If you want to buy silver directly, as in bullion or coins, I’d advise against it, at least until you get more experience as a commodities investor. If you do, go for quality with either the Canadian Maple Leaf coins or U.S. Silver American Eagles. In addition, watch out for hefty fees, especially if you’re buying a lot of silver. Markups of 15% to $30% are not uncommon. Also, don’t get too worked up over the mint value of a silver coin. You’re buying solely for the purity factor, no matter what the seller tells you. So the year that the coin was minted is overrated in my book. These coins are marketed aggressively these days and there is always an attempt to distinguish mints, even though the stuff is made up of nothing but silver. So don’t get taken: A 100% silver coin is a 100% silver coin no matter who makes it. I trust the U.S. and Canadian mints more because they are less likely to be false advertisers in this awful market.
Like always, do your homework, and know that silver is really a function of supply and demand, with some industrial use involved in the equation. It will decline more than gold if worldwide economies simultaneously go into reverse, which is why I don’t like silver as much as I do gold. But, silver is relatively cheaper than gold and that always attracts my attention. Hey, if someone put a gun to my head and told me to choose gold or silver, then I would buy gold. But it’s the momentary disparity in price and the worries I have over the Obama Administration’s stewardship of the economy that draws me to what amounts to be “silver insurance”.
One last thing: To help with your homework, track the historical price of silver over varying periods of time. Do that by checking sites like SilverPrice.org.
Every bear market has as a silver lining. This one does, too.
—Brian O’Connell contributed to this article.