An Asset More Precious Than Gold?

The Queen of England gifted an unusual item to the President of Mexico at the G20 summit in London … more fascinating even than President Obama's gift to her of an iPod loaded with Broadway show tunes. The monarch gave President Calderon a copy of George Orwell's Nineteen Eighty-Four.

Silver, while abundant in Calderon's homeland, remains precious in a world flooded with paper assets. Still, with headlines heaping greater attention upon gold as a safe haven, silver is like the downtrodden prole eking out a meager existence under the shadow of its gilded big brother. In truth, silver has every bit the precious pedigree of gold, with its monetary use dating back to ancient Sumeria. The countless industrial applications for silver further enhance the metal's allure.

The Earth's crust contains about 15 ounces of silver for every one ounce of gold, and the long-term relationship between the values of the two metals echoed that geological truism for many centuries. Today, however, one can obtain 70 ounces of silver for the price of an ounce of gold. This huge disconnect from the historical ratio forms an important foundation for this Fool's contention that silver could deliver greater upside than gold as the mother of all currency crises plays out on the world stage.

The slingshot effect
I find it helpful for investors looking at silver for the first time to visualize the slingshot effect. Picture gold and silver tethered together by a long rubber band. When gold moves in either direction, silver often lags gold's movements while potential energy is stored, but ultimately makes larger-percentage moves. Given this phenomenon, Fools seeking a safe haven from mounting stagflationary inputs could find refuge in gold's little brother.

Please note: Understanding the silver market, and especially the mining sector, requires substantial research and diligence, and the correlative danger of the slingshot effect is that it applies to downward movements in gold as well. Nonetheless, I believe that long-term upward pressures upon the gold price are mounting considerably. When gold makes its next big move, silver may enjoy a most precious bounce.

Selecting silver bullets
Physical bullion is the most straightforward vehicle for silver exposure, but most investors opt for some form of bullion proxy. While the iShares Silver Trust (NYSE: SLV  ) provides one option, I prefer the Central Fund of Canada (AMEX: CEF  ) for its longer track-record and fairly even split between gold and silver bullion holdings.

My top pick among silver miners conducts no mining at all. Instead, Silver Wheaton (NYSE: SLW  ) purchases silver streams -- contractual rights to purchase silver -- in exchange for up-front capital which miners use to develop their operations. The shares have come a very long way from their multiyear low, struck on Nov. 25, 2008. After reporting this week that attributable reserves grew in 2008 by 24% to 429.7 million ounces, due mainly to exploration success at Goldcorp's (NYSE: GG  ) massive Penasquito mine, Silver Wheaton continues to look significantly undervalued. In fact, I find shares trading at the equivalent of about $3.30 per ounce of silver in the ground. With a stable all-in cost of production of about $5.89 per ounce, the margins for Silver Wheaton at today's price near $13 remain extremely robust.

This has been quite a week for silver miners. Just weeks after commissioning the new Manantial Espejo mine in Argentina, Pan American Silver (Nasdaq: PAAS  ) completed its expansion of the San Vicente project in Bolivia. Expecting 1.9 million ounces from that upgraded operation, the company now forecasts 21.5 million ounces of silver production at an average cost of $6.28 per ounce for 2009. Alongside prudent adaptations executed during the worst levels of the lingering silver correction, Pan American sustained its strategic growth initiatives while maintaining a debt-free balance sheet, and looks to have only grown stronger during this painful period of weakness.

Coeur d'Alene Mines (NYSE: CDE  ) knows a thing or two about weakness. Weak silver prices, a string of operational setbacks, deeply entrenched short positions, and liquidity concerns all combined to send shares of this 80-year-old mining company to an incredible multi-year low of $0.36 last November. Coeur d'Alene Mines initiated production last week at the world-class Palmarejo mine in Mexico, just as production is ramping up at San Bartolome in Bolivia, permitting the company to target 20 million ounces of silver production in 2009. Both Coeur and similarly downtrodden Hecla Mining (NYSE: HL  ) have begun to show serious signs of life in recent weeks, but neither stock is fit for the faint of heart.

Silver, in fact, is not for the faint of heart. With that slingshot effect, it is capable of gut-wrenching movements that will test the will of investors. Without staking any claims regarding short-term movements, I stand by my long-held assertion that the multi-year secular bull market for silver remains fully intact.

Further Foolishness:

In CAPS, 1,484 members, including 478 All-Stars, have selected five-star-pick Silver Wheaton to outperform the S&P 500. Create your own portfolio at Motley Fool CAPS, and get on your way to becoming an All-Star investor. CAPS is free and fun!

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Coeur d'Alene Mines, Central Fund of Canada, Hecla Mining, Pan American Silver, and Silver Wheaton. The Motley Fool's disclosure policy is .999 pure.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 03, 2009, at 6:06 PM, ayekappy wrote:

    Actually, the Queen of England giving the book 1984 to anyone as a gift this day and age scares the crap out of me. In a really, really bad way.

  • Report this Comment On April 03, 2009, at 6:10 PM, nin4086 wrote:

    I see no reason why there should be a linear relation between abundance and price. Silver may have more uses but gold may have more valuable uses. And the price is gold is determined to a large extent by "cosmetic" and "fake economic" uses that are difficult to quantify.

  • Report this Comment On April 03, 2009, at 6:14 PM, ayekappy wrote:

    Oh, one last comment:

    Has silver lagged behind gold because gold was in the bubble and silver was not as much? Neither metal is really worth as much as it used to be. What's the point of a gold-whatever when you can have a GPS or some internet? Gold isn't what it used to be, much like frock coats and monocles.

  • Report this Comment On April 04, 2009, at 11:34 AM, XMFSinchiruna wrote:

    nin4086,

    The laws of supply and demand create that relationship between abundance and price. Think of that geological incidence ratio as the ultimate supply-side relationship between two similarly sought-after metals. Their shared monetary roles have linked the demand side together for centuries.

    There is nothing "fake" about gold as a currency. It's paper fiat currency which you need to scrutinize for evidence that it has any "real" value.

    http://www.fool.com/investing/international/2009/04/01/an-op...

    http://www.fool.com/investing/international/2009/03/27/the-m...

    ayekappy,

    Over the course of the multi-year secular bull market in precious metals to date, which began in 2001, silver at times has already demonstrated the slingshot effect by outperforming gold on a percentage basis. Gold quadrupled from 2001 to reach above $1,000 first last year, but silver quintupled from just over $4 to reach beyond $20. The slingshot has already been observed by this Fool countless times during this run.

    Neither metal is worth as much as they used to be? Even these prices, well off recent highs and massively below inflation-adjusted historical highs, present irrefutable evidence of their enhanced nominal value in a world flooded with paper.

  • Report this Comment On May 26, 2009, at 7:17 PM, mode7 wrote:

    "The monarch gave President Calderon a copy of George Orwell's Nineteen Eighty-Four."

    With all the CCTV in England, ironic, no?

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