Best Play on Silver
Research for Online Investors

by John Dalt

1/5/11

We made silver our ‘Trade of the Year’ in 2010, and it was a good one.  The silver etf (SLV) was up 82.6% in 2010  The toughest thing to admit, we didn’t follow our own advice for our subscribers in the long-term portfolio.  Sure, we bought the AGQ back in June, and then sold it a week later for a 10.8% profit.  We traded it a few times in the SwingTrader to good effect. We were too conservative.  We wanted the lowest entry price for our long-term subscribers, because we just didn’t want a chance to lose money on it.

So what did we ‘leave on the table’ while waiting for the very best entry price?  A ton of potential profits.  But, I would add, that is the nature of long-term investing, trading and fishing.  How many times have we talked about the ‘trophy’ fish that got away, or the prize winning buck that ducked just as we pulled the trigger?  As investors and traders, how many times have we watched a stock we wanted to buy, run away from us?

Last year, in an overabundance of caution, we watched silver run away from us in the summer and never dip to give us a chance to get on board.  I hate to think we owned the AGQ for $55.00 in June; it closed the year at $158.59!

I am not ready to name our trade of the year for 2011 just yet.  Let’s see what the new congress does for a few weeks.  Are they going to cut the U.S. government budget?  Will the government truly do anything to cut our consumption of foreign oil, or just talk about it?  I still think natural resources will be strong players in the coming year.  Their importance is amplified by the risk trade of inflationary pressures in the U.S., so we want to know if the government can cut its diet of ‘free’ money.

With all this in mind, we still like silver for 2011.  We like it so much we are in the AGQ, and will stay until we see a reason not to be.  We like silver as a precious metal play better than gold, because it also has industrial uses.  All of the production and recycling doesn’t just go into some safe as a store of value in case of Armageddon.  Every computer, TV, and any other electronic device needed by mankind has some silver content.

Even if the luster of gold gets tarnished, silver is still a necessary commodity in our consumer society.  Silver is like owning copper, with a gold clad.  What is the best way to play the silver market?  Straight forward precious metals investors may like to own bullion or bars.  We have also brought you information about the Perth Mint Certificate program.  This program allows you to own silver without any storage costs.  Perth Mint Certificates also have the added benefit of moving your assets out of the United States, and out of the reach of the IRS since the U.S. government does not consider gold or silver as money.

It is not real money!

You may also consider the use of the Silver ETF (SLV); this etf holds physical silver in vaults to back the shares.  We like to use the U.S. Silver Ultra etf (AGQ) as this seeks to double the daily movement of the price of silver.  The AGQ does have some tracking error; that is it does not exactly double silver’s movement over a long period of time, but it does well enough for our use.

Another way to play any commodity is to own the companies that produce the commodity.  We can own silver mining companies.  If the price of silver moves higher, silver miners will make more money on their production.  Last spring a new ETF was started, it is called the Global X Silver Miners Fund (SIL).  This etf owns shares in twenty-five silver mining companies with wide diversity around the globe.

Owning miners can provide more leverage than an ultra etf, let me explain.  The premise here is the same we applied when we bought Suncor Energy (SU) the Canadian oil sands producer.  SU’s cost of production is approximately $50 per barrel of oil, so at $50 crude they break even.  At $55 per barrel they should make a 10% profit margin, at $60 per barrel their profit doubles and on and on.  Every time crude oil increases in price, their bottom line jumps multiples.

Precious metal miners are the same.  They have a cost of production to bring the ore out of the ground and process it for sale.  When the silver price increases 10%, their bottom line may double.  An ultra ETF would give you a 20% pop, but a miner will report double earnings…what will that do to the stock price?  This brings us to our take away today, if you like silver for 2011, then look at the SIL etf for a leveraged play.  SIL gives you the diversity of multiple companies so one company’s mistake won’t kill you, and the leverage to silver you may desire.

Remember, if it amplifies the price of silver going up it will also amplify the price going down.  Our best advice would be to buy small positions on the dips and watch the 50-day moving average.  You should be able to establish a position over the next couple of weeks.

To the mailbag:
What do you think of the lower volume in the markets, compared to 2008/2009?---paid up subscriber R.V.

John’s reply:
I have heard the volume difference is attributable to ETFs.  Traders can utilize ETFs to play a basket of stocks, thus one trade replaces two or three trades.  I don't know if this is valid, but understand the argument.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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