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Central Fund of Canada Limited (USA) (CEF), Silver Wheaton Corp. (USA) (SLW): Should You Be Buying Silver?

I recently wrote about how intelligent investors can diversify their portfolios using gold investments. Gold is, however, not the only historically monetary precious metal that has been beaten down lately – silver also has the potential to resume its decade-plus upward trend.

Silver Wheaton Corp. (USA) (NYSE:SLW)

Silver is not as rare as gold and has industrial uses to go along with its monetary properties. Because of this increased supply and demand, silver currently trades for about $20/oz, which is one-66th of the current gold price. Historically, silver’s low price has made it more volatile than gold, allowing bigger gains in up periods and correspondingly bigger hits in down periods. The gold/silver ratio has typically been between 30 and 50, implying that along with strong macro trends, silver will revert to this mean going forward.

The following article will follow the same format as the previous regarding gold.

Physical silver

It is fairly easy to buy actual physical silver. Visiting a local coin dealer will allow investors to buy silver by the gram or ounce. Typically the dealer will sell bags full of old quarters and dimes that have a high silver content (before 1964 all quarters and dimes were made from silver.) Unfortunately, if one wishes to invest a high percent of his portfolio in silver, the necessary weight makes this option prohibitive. Additionally, some coin dealers can act like unethical mechanics, recognizing new buyers and ripping them off.

Thankfully, there are ETF solutions. I mentioned the Central Fund of Canada Limited (USA) (NYSEMKT:CEF) in the previous article. The Central Fund of Canada Limited (USA) (NYSEMKT:CEF) is a closed-end fund that currently has a 46% allocation to silver. Unlike some of the more popular funds, the Central Fund of Canada Limited (USA) (NYSEMKT:CEF) holds physical gold and silver bullion, allowing it to track the actual prices of its portfolio better and cutting down on its expenses, which are just 0.3% annually. Finally, the Central Fund of Canada Limited (USA) (NYSEMKT:CEF) currently trades at a 4% discount to its net asset value (NAV), which adds a small arbitrage kicker to the potential gains.

The most popular fund for silver is the iShares Silver Trust (ETF) (NYSEMKT:SLV), which has assets under management of $6 billion. The iShares Silver Trust (ETF) (NYSEMKT:SLV) is perfect for investors who want to invest only in iShares Silver Trust (ETF) (NYSEMKT:SLV) without the gold exposure in the Central Fund of Canada Limited (USA) (NYSEMKT:CEF). Since the trust’s inception in April 2006, it has tracked the actual silver price well, as shown in the below table from the fund’s site. The small difference is due to the trust’s 0.5% annual expenses.

Silver miners

There are a lot fewer silver miners than gold miners due to the fact that most silver is mined as a secondary metal in a mine focused on gold, copper or some other metal. Because of this, it is more difficult to find a miner focused solely on silver. However, the same principles of operating leverage and multiple expansion apply for silver miners.

As with gold miners, I do not recommend investing in any single miner but was able to find a fund that invests in silver miners. The Sprott Resource Lending Corp. (USA) (NYSEMKT: SIL) invests in the silver miners present in the Solactive Silver Miners Index and charges 0.6% annually.

Though I recognize several of the names in the index, I have several problems with its composition. The index is weighted based on “free-float market capitalization.” Weighting based on free-float market cap means the index uses only the floated shares (total shares – minus shares owned by insiders) in its companies to calculate market cap, and then allocates based on size, putting more into the larger companies.

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