Silver bullet

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Some argue silver will provide better returns over the long run because of its combined appeal as a precious metal and an industrial commodity.

"We're getting more of a confident mood in our industrial commodities, and industrial commodities are gaining favour and that means silver is gaining favour over gold," said Bob Tebbutt, vice-president at Peregrine Financial Group.

John Stephenson, portfolio manager at First Asset Funds Inc., said industrial applications -- including electronics, chemicals, batteries and medical instruments -- make up about half of the demand for silver, and demand for these products will only continue to grow.

In addition, supply has been constrained along with the supply of most industrial metals, as fewer new mines are coming online and existing mines have been shuttered in response to the economic downturn.

On top of this, silver, like gold, also tends to benefit from fears of inflation, which are common now due to rampant government stimulus spending.

Because of this growing demand and shrinking supply, the gold-silver ratio, or the number of ounces of silver worth one ounce of gold, has shrunk in recent months. The ratio went as high as 84:1 in October 2008 as investors flocked to the relative safe haven of gold, but has since shrunk to below 64:1 despite gold's recent rally to a record high of US$1,100 an ounce and beyond.

Silver currently sells for around US$17.50 per ounce compared with a record high of around $50 per ounce.

"Gold has made new highs, silver has not made new highs, so therefore there's probably significant room on the upside for silver," said John Ing, CEO of Toronto-based investment dealer Maison Placements.

Ing said he has a near-term target of $22 per ounce for silver, while Stephenson said $25-an-ounce silver is possible, particularly as gold continues its historic climb.

"Almost without exception, if gold's trending up, silver should be as well," he said.

"And given that not only has silver not trended up as sharply as gold, but it's trading several multiple points below its historical average over time, which has been about 56:1, and it's now 64, there's an opportunity to buy some silver and ride it up."

Ing said physical bars of silver can be a "very attractive investment," although it's possible to get more leverage by buying shares in silver companies.

Stephenson also recommended stocks, although he acknowledged that there are very few companies out there that produce only -- or even mainly -- silver.

Canadian companies that produce more than 50 per cent silver are Coeur d'Alene Mines Corp. (TSX:CDM), Pan American Silver Corp. (TSX:PAA) and Silvercorp Metals Inc. (TSX:SVM). Silver Wheaton Corp. (TSX:SLW) doesn't own mines, but rather invests in other companies' silver production, which means it doesn't face any of the operational risks of running mines, Stephenson said.

Meanwhile, Tebbutt recommends buying silver futures, or contracts obligating the buyer to purchase physical silver at a predetermined future date and price

-- The Canadian Press

Republished from the Winnipeg Free Press print edition November 14, 2009 B15