You'll Never Guess What's Outperforming Silver

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We've all heard the debate of which is the better buy, gold or silver. Silver is rarer and has far more practical applications, whereas gold is the metal upon which the strength of worldwide currencies are compared -- and thus a far less volatile investment. We could debate this pretty much all day -- and we have on many occasions -- but what's really shocking is a stat I uncovered over the weekend.

Year to date, silver has dropped 3%, which already has many investors in awe. If silver is supposed to be this great alternative investment to gold and is often viewed as a safety net in times of uncertainty, then how could it possibly be down? This questioned hounded me until I discovered the following: The U.S. Dollar Index is outperforming silver year to date.

It's not exactly a runaway mauling, but the U.S. Dollar Index is down just 0.3% compared to silver, which is down more than 25% in the past two weeks, and 3% year to date. This demonstrates the dangers of buying strictly into physical metals themselves because it leaves you exposed to wild price swings. In addition, considerably more stringent margin requirements at the CME (NYSE: CME  ) are making optimists' lives difficult in light of a weakening market.

So what's an investor who feels strongly about silver's long-term prospects to do? Why not dip your toes into the mining sector, which up until recently had vastly underperformed their physical metal counterparts.

Silver Wheaton (NYSE: SLW  ) is a name that comes to mind as particularly inexpensive when you consider the long-term cost basis of its contracts. Just last quarter, the company reported fixed costs of approximately $4.10 per ounce with an average silver price north of $38 per ounce. Even with a drop in the underlying metal, Silver Wheaton's cash flow is still far and away crushing its competitors.

Another name to consider is the highly publicized Silvercorp Metals (NYSE: SVM  ) . Because of the company's high concentrations of lead and zinc in its mines, the sale of these by-products allows the company to mine silver at a negative cost-basis. With sales of the company's silver averaging $29.99 last quarter, it's no surprise that the company is strongly profitable and maintains double-digit growth in its cash flow.

The point is that there's been a major disconnect between miners and the metals that they mine -- and it appears the tide is finally turning. Inexpensive miners with strong cash flow and high profit margins could be ready to move higher and significantly outperform the underlying metal at least for the foreseeable future.

What's your two cents on the matter? Would you buy silver, go after individual silver miners, or simply avoid all things silver at this point? Share your thoughts in the comments section below, and consider adding Silver Wheaton and Silvercorp to your Watchlist to keep up on the latest news in the sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He recently discovered the element unobtainium. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (10)

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 October 03, 2011, at 11:30 AM, kshankar10 wrote:

    Yes, with all the currency debasements that are going Silver and Gold are the place to be. Note there will be volatile swings, so this is not for the faint-hearted. Better still use options to trade in Silver and Gold.

  • Report this Comment On October 03, 2011, at 2:53 PM, rfaramir wrote:

    I'd like to respectfully disagree with this part: "This demonstrates the dangers of buying strictly into physical metals themselves because it leaves you exposed to wild price swings. In addition, considerably more stringent margin requirements at the CME (NYSE: CME ) are making optimists' lives difficult in light of a weakening market."

    Buying the physical metal (means taking delivery of it, not just holding paper claims to it, which may or may not hold up) does NOT leave you "exposed to wild price swings." Your emotions may be 'exposed' but that's all. If, on the other hand, you had a leveraged position, or a futures contract, or some other form of paper gold or silver, then yes, you would be "exposed to wild price swings" since your 'bet' on the price would fluctuate between a winning and a losing bet depending on how it fluctuated.

    Your inclusion of "margin requirements" kind of makes my point for me. I don't know of any possible effect "margin requirements" could have on purchased gold or silver in my hot little hands.

    On SLW, I totally agree, and am long. I'm considering going long SVM, as well, but have not, yet.

  • Report this Comment On October 03, 2011, at 3:03 PM, TheDumbMoney wrote:

    The stocks of miners represent a long-term claim (by which I mean, over 20-30 years) on the cash flows of the companies, like any other company.

    Accordingly, perhaps the market is saying that it is not so sanguine on silver's (and gold's) long-term prospects as it is on short term prospects?

    There is no rule that miners have to track the metal. If the market anticipates the bull in gold and silver (to the extent the silver bull is not already over) only to last even for two to four more years (which is still a long time for a holder of actual gold to make profits), it makes perfect sense that miners will never, ever, acheive the heights the actual metals achieve, or that one "expects" based on calculating the price of the metals now.

    With silver taking a gigantic dip of late, and with all non-investment aspects of demand (industrial, photograph, jewelry, etc.) at issue because of a possible economic dip, it is hard for me to see how silver miners get a huge pop from here.

    Now, if the market is wrong on the substantive propositions, then at the end of the day miners will have even farther to rise.

  • Report this Comment On October 03, 2011, at 4:49 PM, shawncorrigan wrote:

    nice article, i wish someone with more knowledge would attack with clarity this question. what will be the effect of the tremendous paper precious metals positions as the faith in them continues to wane.? i have heard figures of 100 to 1 times the paper to physical precious metals . i think this will drive the spot price lower and lower, as the physical price goes higher or at least the premiums go higher. also i do see, as the nations scramble to save a sinking fiat currency ship ,they will try to force some wealth into the failing sectors. the idea of ,forcing people out of PM'S thereby sending it into the other failing sectors by default ,seems like another dastardly plan that may be used. i am certain that physical precious metals will win in the long run.

  • Report this Comment On October 03, 2011, at 4:55 PM, shawncorrigan wrote:

    i have run my own businesses for 35yrs, producing fuel,food and housing ,employing hundreds.

    i know how companies love to entice investors and sell shares. i would not trust a damn one of them. books can be cooked. star your own company is my motto, dont buy stock. the government regulates you, the company has no reason to be honest. who lost their shirt with the GM bailout. the stockholders got the shaft. as this country becomes more communist the stockholders will be the losers. are there good companies, sure, even those have government monkeywenches thrown at them. and "i'm sorry" just doesnt cut it.

  • Report this Comment On October 03, 2011, at 9:46 PM, geo811 wrote:

    The more traders SHORT THE MINERS when the items they mine are going up the more it is GUARANTEED


    That shows fear is > than greed thus all the silver bubble talk people make of = BS.

    Better pump the miners to their new highs before they call it a bubble or there IS NO BUBBLE idiotic main stream media.

    anyway good luck.

    This is why I ADVISE ALL miners to follow svm and paas path BUY BACK shares until there is nothing left then take it private or give insane dividends in the long run to stick it into the shorts and thank them for lowering the costs of consolidating themselves.

  • Report this Comment On October 04, 2011, at 5:46 AM, reflector wrote:

    several points in this article don't sit well with me at all.

    "Year to date, silver has dropped 3%, which already has many investors in awe."

    while technically this is true, your choice of timeline = 10 months is very suspicious.

    more typical would be a comparison of commodities over a full 1 year period, here is a helpful graph:

    notice silver is at the very top of the chart.

    "If silver is supposed to be this great alternative investment to gold and is often viewed as a safety net in times of uncertainty, then how could it possibly be down?"

    this is a strawman arguement.

    try being honest.

    WHO specifically are you claiming "often views silver as a safety net in times of uncertainty"???

    of the many precious metal investors and analysts i've read, NO ONE views silver as any sort of "safety net".

    UNIVERSALLY what PM analysts will tell you is that silver will have a high correlation with the price of gold, but will be much MORE volatile with greater price swings.

    it will rise faster and it will fall faster, than gold, *nobody* views it as any sort of safety net, that is rubbish.

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