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With consumer confidence plunging and governments around the world racking up seemingly unpayable bills, many investors have sought refuge outside of fiat currencies in order to help protect some of their assets from the ravages of inflation, which is sure to come eventually. Almost by default, investors have piled into gold which has seen its price soar to $1250/oz. before dropping back to the $1160/oz. level it is at currently. This recent pullback has left gold investors will an interesting dilemma: buy more assuming that the economy or the dollar collapse, or sell as the economy picks back up on the back of solid corporate earnings in a variety of sectors.
Although gold remains an excellent hedge against failing currencies, it does not offer the same upside in good times that its cousin silver does which is extremely important in these uncertain times. This is because gold has virtually no industrial uses, while silver finds its way into a host of critical applications, ensuring that the metal will be in demand no matter if a boom or a bust is in our immediate future. This is especially important in today's economic climate since the economy could seemingly turn in either direction at any time; there is plenty of data to support both sides of the debate. Due to this conflict, we believe that silver could make an interesting choice for investors who are concerned about the world's fiscal condition [see Silver ETFs: A Better Investment Than Gold?].
Not only does silver have a variety of uses, but demand is currently outstripping supply. In fact, it is estimated that for every 1.5 ounces of silver that are consumed, 1 oz. is produced, suggesting that as time goes on, silver only becomes more in demand for its multitude of uses. So while gold receives the bulk of the attention because of its high price and rarity, an excellent case can be made for investing in silver as well. Below, we profile the seven best reasons why demand for this metal is likely to stay high, no matter what the economic situation [also read Five ETFs For A Double Dip].
- Electronics -- Virtually every electronic appliance on the market today has a sprinkling of silver in it, including switches on ovens and TVs, circuit boards, and RFID tags. The metal is even used to coat CDs and DVDs because of its ability to resist tarnishing. Due to its wide use in the electronics sector, which has been booming despite overall market weakness, silver demand looks to remain high in high-tech.
- Batteries -- Silver-zinc batteries have become extremely popular within the aerospace and defense industries, which value the power source due to its 40% longer run-time than the more widely used lithium-ion batteries. However, since the batteries can't be recharged as much as their counterparts, they are unlikely to experience widespread adoption in the near future. Yet, if this can be rectified, silver-oxide batteries could take off; many consider them more environmental sound, and they feature a water-based chemistry, unlike many other batteries. Either way, the batteries are likely to remain popular with militaries around the world and other outfits who need an extra long charge, a factor which could help to boost silver demand if the industry takes off [see Global X Lithium ETF Hits The Market].
- Photography -- While the amount of silver being used for photos has gone down considerably as more consumers shift to digital photos, the precious metal still plays a vital role in x-rays, which is expected to be a heavy growth market in emerging countries, where living standards and health-care practices are rapidly improving. Still, the sector uses roughly 128 million ounces of the metal every year and accounts for a large portion of silver demand that seems unlikely to evaporate in the near future.
- Catalysts -- Surprisingly, silver is a crucial component of several industrial processes, including the making of plastics. More than 700 tons of silver annually are used in the world's chemical industry for the production of two compounds -- ethylene oxide and formaldehyde -- both essential to the plastics industry. These chemicals are also used in polyester production, antifreeze coolants, and surface coatings, ensuring that virtually every product is touched by silver in some way.
- Historical Ratio -- In much of the world's history, the price ratio of silver ounces to gold was around roughly 16:1, which is about the ratio of the metals' occurrence in the ground as well. Since silver's nominal high back in 1984, the ratio has been hovering near 45:1, while the current ratio stands at about 65:1, suggesting that either gold will have to fall dramatically, or silver will have to rise in order to get the numbers back into line with historic levels. At current price points, the dollar value of silver would have to rise up to $25.8/oz. in order to make the 45:1 ratio hold; a nearly 50% gain for the white metal.
- Emerging Market Demand -- The world's three major currencies, the dollar, the euro, and the yen, all have severe fundamental issues because of the high levels of debt and slow growth in the countries they represent. As their government budget situations get worse, more investors are likely to lose faith in the currencies, which could increase demand for alternatives such as gold and silver. While many believe that gold will be a primary beneficiary of this trend, I believe that silver is more likely to come out a winner. This is because of the emerging markets and the increased demand that these individuals will put on the silver markets. Most low-income individuals in many emerging countries such as China and India simply could not afford to buy a gold coin as a hedge since, in most cases, the price would be more than a year's salary. However, silver, with a price less than $20/oz., is easily affordable by billions and is more likely to see capital inflows for this very reason should more people lose confidence in the U.S. dollar and other major world currencies [also see How Emerging Markets Offer A New Way To Invest In Commodities].
- Solar Power -- As demand grows for alternative fuel sources, silver is likely to be a primary beneficiary. Silver paste is used in 90% of all crystalline silicon photovoltaic cells, which are the most common type of solar cell on Earth. The metal has also found a way into other areas of the solar market. The commodity is now being used to "generate electricity by reflecting and concentrating solar energy onto collectors containing salts which are used to run generators," according to the Silver Institute. Should alternative energy investments pick up in the near future, it could end up having a bullish effect on silver prices [also see The Guide To Solar ETF Investing].
Ways To Play
While buying silver coins and bars remains an attractive option for many investors, there is often a markup associated with buying from dealers and selling the products back remains illiquid and often very expensive. Due to this, many investors have embraced ETFs as a way to obtain exposure to the precious metal. Below we profile four funds that offer exposure to silver [also make sure to read The Definitive Guide To Silver ETF Investing].
- iShares Silver Trust (NYSE: SLV ) -- This iShares fund is the most liquid and popular silver ETF available to investors; the fund currently has $5 billion in assets under management and average daily trading volume approaching 10 million shares. The fund charges an expense ratio of 0.5% and has produced a gain of 26.9% over the past 52 weeks.
- ETF Securities Silver Trust (NYSE: SIVR ) -- This fund offers similar exposure to SLV except that it is not as widely traded but it has a much lower expense ratio, making it perfect for buy-and-hold investors. The fund is also famous for holdings the silver in secured vaults and disclosing the individual silver bar numbers on the company's website. As an added layer of security, the holdings are inspected twice a year by an independent assessor, which should help to give investors piece of mind that their silver investment is in good hands [see Why You Need A Swiss Gold ETF].
- PowerShares DB Silver Fund (NYSE: DBS ) -- For investors seeking a futures based strategy, DBS offers a compelling choice. The fund tracks the Deutsche Bank Liquid Commodity Index-Optimum Yield Silver Excess Return which is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver and currently consists of December silver futures. Since the fund's inception, it has outperformed both the S&P 500 and the Barclays Capital U.S. Treasury 20+ Index by more than 500 basis points.
- Silver Miners ETF (NYSE: SIL ) -- Some investors are wary about investing in a coin or a bar, luckily the Silver Miner ETF exists to alleviate that problem. The fund tracks the Solactive Global Silver Miners Index, which is designed to reflect the performance of the silver mining industry. The fund currently holds 24 securities in total and has large allocations to Silver Wheaton Corp (NYSE: SLW ) (14.3%), Fresnillo PLC (13.8%), and Pan American Silver Corp (Nasdaq: PAAS ) (12.4%). Since the fund's inception in mid-April, it has lost 2.2% while charging an expense ratio of 0.65% [read more about SIL on the fact sheet].
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Disclosure: Eric is long silver bullion.
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