Buying Silver: How To Eliminate Silver Coins & Bullion With One ETF

by Floyd Brown

Buying Silver: How To Eliminate Silver Coins & Bullion With One ETF

by Floyd G. Brown, Advisory Panelist, Investment U

Wednesday, January 23, 2008: Issue #755

When I began investing in the 1970s, America was in a period of great stock market distress. Like today, we were enjoying a dramatic bull run in natural resources. Oil and gold were many contrarian investors' premiere investments in those days.

Also like today, the U.S. dollar was under attack as a store of value. Financial stocks were in distress, and inflation was a factor. Jimmy Carter was President. Gas lines were the order of the day. And the great bull market in stocks of the 1980s had yet to appear. The Dow was under 800.

But silver was shining bright with promise...

So as a small investor, I took the $500 I earned as a paperboy and began buying silver. I followed the time-honored, historic tradition of protecting some wealth in silver during difficult times. And I recommend following it today, too.

Here's why, and the easiest way to buy silver...

Buying Silver - A Great Way To Diversify Your Portfolio

The Associated Press headline - "Stocks Fall Sharply Amid Worries Over Investment Bank Write-downs, Anxiety About Earnings" - blanketed the country last week. It's a headline we've read almost daily since the great credit crisis of 2007 began last July.

Since then, investors have lost billions of dollars holding the wrong stocks. Yet savvy ones have protected themselves using the single most powerful investment tool available: diversification.

While most of the losses that have occurred are in financial stocks, many other assets have actually done remarkably well. To be sure, a diversified portfolio can easily weather financial storms, and even prosper. Owning silver, of course, is one great way to diversify. It has been for centuries...

Silver's been used as a store of value or as money since long before the time of Christ. It may be the oldest form of coinage...

Silver's First Historical Appearance

Around 700 B.C., mined silver first appeared and was minted into coins by the ancient Lydians. For Greece and Rome, silver was used extensively as coinage and money. Later, silver was refined and coined in its pure form by more modern economies. The British monetary unit name "pound" is derived from the fact that it originally represented the value of one troy pound of sterling silver.

Today, silver is an important industrial metal. It actually conducts electricity better than copper. Therefore, it's used in some of the most important electronic devices and batteries. It's crucial in many forms of photography. And it's becoming more important again in medical applications. Silver has an ability to repel bacteria, too...

In ancient times, the Phoenicians stored water, wine, and vinegar in silver bottles to prevent spoilage. In the early 1900s, Americans often put silver dollars in milk bottles to keep it fresh. Its antibacterial effects are one of the reasons it has been traditionally used in eating utensils.

Silver went out of fashion with the development of modern antibiotics. However, recently there has been renewed interest in the metal as a broad-spectrum antimicrobial. It is now being used to prevent infections as part of wound management procedures, particularly with burn victims.

In 2007, AGC Flat Glass Europe introduced the first antibacterial glass to fight hospital infections. The glass is covered with a thin layer of silver. The FDA has approved an endotracheal breathing tube with a coating of silver after studies found it reduced the risk of ventilator-associated pneumonia.

Demand is certainly on silver's side. But there's another reason to own it...

The Gold-to-Silver Price Ratio is Shrinking

The historic ratio between the price of gold and the price of silver tells us an interesting story...

Over the last 100 years, the price of silver and the gold/silver price ratio have gyrated due to competing industrial and store-of-value demands. In 1980, the silver price rose to an all-time high of $49.45 per troy ounce. By December 2001, the price had dropped to just $4.15, and has risen back as high as $16.31.

In 2007, silver prices (and most other metal prices) have been rather volatile. But during bull markets in metals, the ratio between the price of gold and silver drops as the price of silver grows more quickly than the price of gold.

Here is the historic chart of these ratios:

Historic Price of Silver vs. Price of Gold

I believe this ratio could continue to shrink as the market for these metals continues to heat up. That's why at this time I prefer buying silver over gold.

Buying Silver Is As Easy As One ETF

In the past, the ability to diversify your portfolio when investing in precious metals was difficult. When I was buying silver in the 1970s, it wasn't easy. I had to take delivery of the actual metal. I bought my silver in the form of pre-1964 American Roosevelt and Mercury dimes. And I've been carrying those dimes around ever since. They still today sit in the bottom of my bedroom dresser. The pain and suffering of selling them is just too great.

How I wish I had the option of buying a silver ETF in those days!

Today, exchange-traded funds have made diversification a snap... in a variety of asset classes. Now you can buy silver the same way you buy stocks. You can keep it in any brokerage account. You can even have silver in your IRA or even many 401(k) accounts.

My recommendation today is that you buy silver using the iShares Silver Trust (AMEX: SLV). Take a look at how this ETF has performed in the last six months:

Buying Silver with iShares Silver Trust (AMEX:SLV)

There is no need today to own the actual metal. I don't recommend that you take delivery of physical coins. Take it from me, they're a pain to carry. (They are heavy). Storage, transaction costs, and transportation risks are all eliminated when you buy this ETF.

In short, it pays to diversify. Owning some silver will let you benefit in good times and in bad.

Good investing,


Floyd Brown, a regular contributor to Investment U, began his highly successful investing career while still in high school... and made his first million before turning 30. To see what else he's recommending, here are the five energy picks he made last week.

Today's Investment U Crib Sheet

Companies that find and extract silver can offer bigger gains. That's because as silver prices move higher, their production costs remain relatively fixed. And profit margins begin to look very, very attractive.

Silver Wheaton (NYSE: SLW), for example, boasts a 54% profit margin, and its stock is up 65% over the last 12 months. The price of silver is up 24% over that time. Take a look at the four silver producers below. Each company has a market cap greater than $1 billion and generates plenty of profit...

  • Company: Pan American Silver (Nasdaq: PAAS)Profit Margin: 31%

    1-Month Return: 19%

  • Company: Coeur D'Alene (NYSE: CDE)Profit Margin: 24%

    1-Month Return: 14%

  • Company: Silver Wheaton (NYSE: SLW)Profit Margin: 54%

    1-Month Return: 13%

  • Company: Hecla Mining (NYSE: HL)Profit Margin: 28%

    1-Month Return: 5%

The insiders at Silver Wheaton, by the way, are the most bullish about their company's shares. Combined, they own nearly half (48%) of SLW's stock.

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