HardAssetsInvestor

Written by Amine Bouchentouf  |

September 12, 2011

The Commodity Investor: Silver Wheaton Can Capture Silver’s Dual Potential

Details

Silver ETFs and mining equities can offer investors exposure to silver with less risk than futures.

Because there are 18 ounces of silver for every ounce of gold, silver prices have always lagged gold prices, and it is often said that silver is the poor man's gold.

However, unlike gold — which is primarily a precious metal — silver is also a major industrial metal. Almost 50 percent of silver’s demand goes toward heavy industrial and manufacturing for things like computers, cell phones and iPads. Silverware, coins and jewelry account for another 30 percent of demand. Investment demand — currency alternative and inflation protection — accounts for the remaining 20 percent.

So what’s the best way to get exposure to this industrial and monetary commodity?

You can go through the futures market, although that’s not recommended if you don’t have tremendous amounts of trading experience on the floor. There are also silver miners and ETFs that can provide just as much returns (with less risk) as the futures markets.

Silver ETFs

The iShares Silver Trust (NYSEArca: SLV) is currently the most popular silver ETF, with more than $12 billion in assets under management. I’ve analyzed the returns of SLV carefully and determined that they closely track the physical silver spot price as represented by the London silver fix price. As a result, SLV has a 99.4 percent correlation to physical silver. If you’re looking for physical silver exposure without buying physical silver, SLV is a good option.

Another alternative is the Sprott Physical Silver Trust (NYSEArca: PSLV). PSLV and SLV are fairly similar in that both aim to track the price of physical silver and both have physical silver holdings. However, there is one slight difference: PSLV gives you the option to convert your shares in the fund into actual physical silver. It allows you the option of physical delivery, whereas SLV doesn't provide you with that option. So if you ever wanted to take possession of your physical silver, all you have to do is call the PSLV fund administrator and they'll deliver your silver right to your door.

Also, PSLV offers more transparency since you're able to track the fund's physical holdings. Finally, PSLV has a slightly lower expense ratio — 45 basis points, compared with SLV's 50.

The equity markets also offer you direct exposure to silver. One company I like in this space is Silver Wheaton.

Silver Equities

Silver Wheaton Corp (NYSE: SLW) is a precious metals royalty company focusing on silver. Based in Vancouver, B.C., SLW is part bank, part mining company. The modus operandi of SLW is to approach mine operators looking for capital to develop mines. In exchange for an upfront payment, SLW gets the right but not the obligation to purchase the silver streams from specific mines at a predetermined price.

Since the company enters into contracts with operators to purchase future silver streams at a predetermined cost, its input costs are fixed and it doesn’t require additional capital expenditures to generate revenue. Therefore SLW has capital expenditures beyond the initial premium it pays.

And it gets better: SLW has managed to enter into contracts with operators giving it the right to purchase silver at the ultra-low cost of $4 per ounce. Because it doesn’t hedge any of its exposure, it can sell its $4 silver at market prices — currently at around $40 per ounce. Everything above $4 flows right through to the bottom line.