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.
