Christopher F. Davis
Disclosure: I am long SLW.
Panic. Fear. Sell now. That’s what I have been hearing over and over regarding the precious metals these past few weeks. I have been inundated with personal messages and social media inquiries on what to do as gold and silver are under pressure once again this week. They have pulled back significantly from their autumn highs that were hit on October 4th this year after spiking following global central bank actions in August and September. All precious metals, especially silver are taking a beating again this week, and I view the sell-off as a buying opportunity for the long-term investor as prices are back to levels not seen since the lows of summer 2012 (figure 1). The metals have been under heavy pressure in the last 60 days (figure 2) due to the belief that the Federal Reserve may slow its easy money policies as well as the belief that the U.S. and the global economy as a whole is improving. Whether or not you believe the economy is truly improving (as arguments can be made on both sides), the fact is the metals have been hammered, as evidenced by figures 1 and 2.
Figure 1. One Year Silver Prices.
Figure 2. Silver Prices in the Last 60 Days, London and New York Exchanges
At the time of this writing, the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) are down 7.3% and 11.5% respectively year to date. The ETFs that track the miners of these metals are down significantly further in this time. The Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) are down currently off 24% each year to date. The losses in these equities add to the decline since mid-October, and each have corrected well over 35% since the highs.
With the recent Federal Reserve announcement to accelerate its debt-buying program commonly referred to as quantitative easing, the long-term tailwinds are in place for significant dollar devaluation. In recent months it has been stronger, contributing to the weakness in metals. Yesterday the bank of Japan announced a massive round of quantitative easing, which will also contribute to more devaluation of the Yen. This could help the dollar short term, but should also significantly help the precious metals in the long-term. Why does such currency devaluation help precious metals in the long-term? Because as the value of currencies weakens, so does their purchasing power. This is why many seek refuge in gold and silver. Has the fundamental story changed? Hardly. Governments worldwide continue to race to ease their money policies to avert short-term fiscal disaster and prop up their economies. Take a look at the dollar since 1913, when the Federal Reserve came into existence. As you can see it has steadily declined as a result of the US fiscal policy and the Fed’s manipulation of our economy. That’s the cycle. The Fed eases when economy slows and tightens when it is growing too fast. Compare figure 3 to figure 4, which shows silver and gold prices since 1913. As you can see, gold has had ups and downs, but the overall trajectory is up, and at the very least, has held its value over time unlike the dollar. The easing policies so great and the worldwide debts so large that Dr. Marc Faber believes economic collapse is imminent, and gold and silver are an excellent place to be.
Figure 3. Value of the U.S. Dollar Since 1913.
Figure 4. Gold and Silver Prices in the last 100 years
The other unique thing about silver (relative to gold in particular) is its use in industry. Silver is one of the most conductive metals out there, and thus is utilized in photography, electronic devices, optics, medical devices/tools and most recently, in nanotechnology and cellular phones. This use in electronics is a rather new phenomenon (that is compared to the last 10,000 years of silver’s use) and it has significantly increased global demand. Silver is utilized heavily in many high-tech devices. For example, on average, 20 cents of silver is now used in each cell phone.
So what do I think you should do? Well, with more and more writers and analysts becoming bearish prices have dropped to a level in the metals and metal equities that I believe are too attractive to ignore for the long-term investor. In the short-term anything can happen, and I am not here recommending trades. I am recommending long-term investments. In the long-term, the action of the last few months is just a temporary pullback that long-term investors should be pouncing on. Investors in physical bullion should especially use this weakness to add to holdings. I personally have been adding every 3% drop. There is no reason for panic. The old saying remains true, when there is blood in the streets you have to step in and buy. The sell-off has led to the best of breed silver companies becoming oversold and are now opportunity buys for the long-term investor looking to initiate or add to a silver position.
Don’t Panic, You Should be Adding to Your Physical Assets
The sell-off has provided excellent opportunities to add to your physical holdings. In my opinion, the best way to invest in silver is through physical bullion or coins. There are dealers in most cities and merchants on the Internet where you can buy silver bullion bars and/or coins. I not only consider physical silver as a wise investment given government stimulus, but I also consider it to be a form of insurance in case of a total breakdown of the fiat currencies and modern financial systems we have in the world today. If you decide to invest in physical silver assets, do so by only buying from a reputable dealer. The only downside from Internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid such excessive shipping and handling fees.
Non-physical Silver Investments Can Work Too And There Are Many Options
Although I recommend owning physical assets, one option every silver bull should consider, especially those who do not feel comfortable with purchasing physical silver, is through buying units of an ETF or through one of the silver mining stocks.
Sprott Physical Silver Trust (PSLV): The PSLV is an ETF that is backed entirely by physical silver bullion. The fund’s goal is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical bullion. The Trust offers a number of compelling advantages over traditional exchange-traded bullion funds, including bullion storage in Canada, which is not held with a bank-owned custodian. Further, the fund allows investors to redeem units of the ETF for delivery of an equivalent amount of physical bullion. In this regard, the fund is unique relative to SLV and SIVR. Currently PSLV trades at $10.53 a share on average daily volume of 1.02. The 52-week range of PSLV is $10.47 to $14.47.
The iShares Silver Trust; the SLV : This is the most popular silver ETF investment vehicle. It seeks “to reflect the price of silver owned by the Trust, less the Trust’s expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver.” Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market. The fund has $8.9 billion in assets with an annual expense ratio of approximately 0.5%. Although SLV tracks the price of silver, if silver were to remain stagnant for all of 2013, say at $29 an ounce, then SLV would lose value given the fees and expenses. Overall, it does a good job of tracking silver price moves in general, but this caveat is important to consider for a long-term investment. Shares in SLV currently trade at $25.99 on average volume of 9.9 million shares and have a 52-week range of $25.34-$34.08.
Central Fund of Canada Limited (CEF): CEF is a closed-ended commodity mutual fund launched and managed by Central Group Alberta, Ltd. It “invests in the precious metals commodity markets. The fund primarily invests in silver and gold. The company provides an alternative for investors in holding marketable silver related investments. It invests its assets in holdings of unencumbered, allocated and segregated silver bullion and holds its assets in international bar form. CEF’s nominal holdings of bullion certificates are deposited with Canadian Imperial Bank of Commerce.” I encourage investors to consider this company because of the fact that shares are backed by physical bullion. Shares of the company currently are trading down nearly 3.8% this month of April on normal volume, with a share price of $18.77. CEF has a 52 week range of $18.44 to $24.20. This equity is a nice indirect way to gain physical silver exposure and performs well as the price of silver rises.
Silver Wheaton (SLW): SLW is a worldwide silver streaming company. Streaming is a very unique and long-term solvent business approach in the gold and silver space. The company offers a superior alternative to traditional precious metal mining stocks, because in general, the approach SLW takes offers a stronger opportunity for revenue growth with lower long-term overhead than mining companies, many of which are in unstable jurisdictions. SLW has contracts with companies around the world to purchase silver production in bulk at prices well below market value. Once SLW acquires the silver at the predetermined upfront investment cost, it then proceeds to sell the silver at higher prices.
I am becoming fond of so-called streaming companies, as there is less direct risk than the miners, yet the company is subject to the performance of the miners it contracts with, and by extension, the stock is tied to the price of silver. SLW was sold down on average volume with about three million shares exchanging hands daily. I am becoming fond of so-called streaming companies, as there is less direct risk than the miners, yet the company is subject to the performance of the miners it contracts with, and by extension, the stock is tied to the price of silver. SLW is being sold down heavily lately, with over 2.5 million shares exchanging hands a little over halfway through today’s session. SLW currently trades at $28.95, down 3.1% today. The stock is down 19.8% year to date. SLW’s 52 week trading range is $22.94-$41.30. On average, about 4.5 million shares exchange hands daily. The company trades at a 18 multiple but only a 0.87 five year PEG ratio, and currently yields 1.9%.
Pan American Silver Corp (PAAS): PAAS explores, develops, and “operates silver producing properties and assets. The company engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico.” I think PAAS is a strong mining company, but some of the assets, such as those in Argentina are subject to political risks as the nation has been toying with the idea of partially nationalizing metals and mining assets for some time. The stock is getting hit hard today, adding to its already “cheap” share prices. PAAS is down 18.9% this year, currently trading at $15.15 a share. With a 52 week trading range of $13.49 to $22.83 it is approaching its 52 week low. PAAS further yields a bountiful 3.1% annually after recently raising its dividend, a bullish sign in my opinion.
Hecla Mining (HL): One of the oldest and low cost silver miners in the United States, HL operates out of Coeur d’Alene, Idaho. HL seeks to discover, acquire, develop and produce silver, gold, zinc and lead mines in the United States. HL currently has two mines operating in Alaska and Idaho, and is the largest silver producer in the U.S. HL pays a unique dividend that is a minimum of $0.01 per common share. It also attempts to pay dividends that are tied to the payments it receives for the silver it produces. As this is highly correlated to the price of silver, it fluctuates throughout the year, but has ranged from $0.003 cents per share to $0.022 cents per share in 2012, resulting in an estimated 1.2% dividend yield this year. Production should rise in 2013 as the Lucky Friday mine is soon to ramp up production once again. The company has around $200 million in cash with little debt, and anticipates 15 million ounces of silver production by 2015. This miner is presenting an attractive level to establish a position. HL has 52 week trading range of $3.50-$6.94 and on average, about 4.3 million shares exchange hands daily. HL currently trades at $3.77 a share, dropping a massive 35.5% year to date. With production ramping up, the long term tailwinds for silver thanks to additional monetary easing coupled with the sell-off from the highs, HL is increasingly attractive at these low prices.
Conclusion: This week’s losses in silver and silver equities add to the decline since mid-October, and each have corrected well over 30% since the highs. With continued central bank action around the world to accelerate their easing policies it is evident that paper money will be watered down in value. In a stronger economy, there is more demand for silver, also bolstering prices. I reiterate that the time to do some buying of physical silver, silver ETFs and the silver miners for the long-term investor is now. This is especially true for those without exposure to the sector, as increased silver prices in the coming years will rapidly increase the value of physical holdings, as well as pad revenues for the silver companies directly impacting their bottom line, and by extension, resulting in appreciation of share values from current levels. There is no reason for panic. If you are a long-term investor, you just have to buy on the way down. Do not capitulate and sell now.