Silver is often gold’s second fiddle when it comes to precious metals. This makes sense since silver is a much cheaper metal – its price just isn’t as captivating. However, like gold, it is considered a store of wealth and has always been used as a form of currency. So, if you are looking for a precious metal, don’t overlook stocks and silver investments. Having said that, it’s fairly easy to find a gold-focused stock, but much harder to find a silver-focused one. Here are some of the best options for adding money to your wallet, including my top pick, Wheaton Precious Metals (NYSE: WPM).
A little background
Silver is unique from gold in that about half of the demand comes from industrial purposes, like electronics, photography, and photovoltaics. The remainder of the demand for silver comes from jewelry, bullion, and silverware. Demand for bullion and jewelry is much more dependent on the whims of consumer and investor sentiment than industrial demand. This gives silver a stronger demand base than gold, where jewelry, bullion, and central banks account for around 90% of the demand.
The low price of silver compared to gold also makes it more accessible in many ways. Silver recently traded between $ 16 and $ 17 an ounce against gold, which costs over $ 1,275 an ounce. This, of course, is part of why silver is used more in industrial applications and why gold is used more as a store of wealth – you just need less metal to create big dollar numbers. .
Having said that, supply and demand are the main determinants of silver prices. And the main source of money is silver miners, who extract the metal from the ground. Most miners don’t focus exclusively on silver, but you don’t have to buy a miner to gain exposure to silver. Here are three ways to buy money, which I think is the winner hands down.
Some ways to invest
The first way to get money in your portfolio is to invest directly in bullion. If you want to prepare for a situation where fiat currencies are no longer in use (the zombie apocalypse scenario, if you will), then buying silver coins is the best option. In fact, owning money this way isn’t a bad idea, just in case. But transaction costs and storage issues make it a less than ideal way to gain physical exposure to the precious metal.
A much better option is to buy an exchange traded fund on silver like IShares Silver ETF (NYSEMKT: SLV). The main asset of this ETF is, as you would expect, silver bullion. The 0.50% expense ratio is also relatively modest, considering that buying money directly would involve commissions and, possibly, a safe in a bank. It is also much easier to sell an ETF than it is to quickly liquidate a reserve of silver coins. There are other ETFs that offer leveraged exposure to the metal, such as ProShares UltraShort Silver and ProShares Ultra Silver, but most should probably stay away from leveraged ETFs – the risks inherent in leverage are just too high for everyone except the most aggressive and active investors.
The next option for the money is to buy a miner, like First Majestic Silver Corp (NYSE: AG). This is one of the most direct ways to gain exposure to metal through a miner, as First Majestic derives approximately 70% of its revenue from metal. Most other silver-exposed miners focus more on gold, including SSR Mines (TSX: SSRM), which recently changed its name from Silver Standard Resources to emphasize its focus on gold. Silver only accounts for about 20% of SSR’s output. Heart mine (NYSE: CDE), meanwhile, counts silver for about a third of production, compared to 60% in 2010.
In other words, if you are looking for a silver miner, First Majestic is a targeted choice. 2017 is expected to be a tough year in terms of production, down from 2016. However, the company has two projects in development that are expected to significantly increase production over the next two to four years. And it has worked to keep costs down, with both cash costs and all-in sustaining costs each decreasing by nearly 40% between 2014 and 2016. New mines will likely drive up costs in the near term, but it likely will. temporary. problem.
If you are worried about owning a single miner, you can also purchase IShares ETF MSCI Silver Miners Index. The expense ratio is barely 0.39%, which makes it a fairly inexpensive way to get broad diversification from mining money. The only problem is that when you look at the list of ETF names, you quickly see that it includes companies like SSR and Coeur, which are already known to be more gold miners than gold miners. money. A mining ETF is therefore an option, but perhaps not the best way to gain direct exposure to silver.
The best way to go
There is something interesting about the holdings in iShares MSCI SIlver Miners Index ETF. The largest name, with 25% of the assets, is Wheaton Precious Metals Corp. Here’s the thing: Wheaton isn’t a miner – it’s a streaming company. This means that it provides advance money to miners for the right to buy silver and gold in the future at reduced rates. Tt currently pays around $ 4 an ounce for silver and $ 400 an ounce for gold, both well below recent spot prices.
Miners turn to companies like Wheaton when money in banks and capital markets is prohibitive. They use the money to finance mining projects and expansions or just to reduce leverage. Wheaton likes these offers because they guarantee low prices and therefore high margins. These margins remain wide even during commodity declines which push miners’ margins into the red.
The reason is quite simple: a miner has to deal with all the headaches associated with operating a mine. Mining costs, like wages, do not adjust as quickly as commodity prices. Wheaton’s costs, meanwhile, are contractually stuck at low levels, giving it a lot more leeway. In fact, commodity declines are actually the perfect time for Wheaton to expand its business. This is because minors are likely to be in desperate need of money and ready to sign streaming deals. Wheaton’s results will vary with the price of silver, just like a miner, but Wheaton’s ability to grow in a downturn makes it feel countercyclical.
Another reason to love Wheaton over a miner like First Majestic is diversification. First Majestic has six mines and two mining projects in its portfolio. Wheaton Precious Metals has investments in 20 operating mines and eight development projects. In fact, it is probably more appropriate to think of it as a specialist finance company, with a portfolio of mining investments, which is paid in silver and gold.
There is a downside: Silver is expected to account for around 55% of its production over the next few years. This means that you will be less exposed to the money than if you invested in First Majestic. However, I think the benefits of Wheaton’s business model outweigh this issue and make it the best option for investors looking for silver exposure.
Lots of ways to go
Ultimately, there are many ways to gain exposure to silver. You can buy coins, money linked ETFs, silver miners, ETFs that track silver miners, or a streaming company like Wheaton Precious Metals. You have to choose which option is right for you, but I think Wheaton is the best of the bunch. Its diversification, its high margins in good and bad years and its ability to use raw material declines to develop its activities set it apart in an important way. If you want to own a silver stock, I suggest you dive into Wheaton Precious Metals today.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.