Long called "the poor man's gold," silver is likely to outperform its pricey counterpart this year, a trend that makes silver-related equities an attractive option for investors looking to diversify their portfolios.
Spot silver prices rose 48 percent in 2009, and have already risen more than 38 percent this year, while spot gold prices are up around 23 percent.
The gold-to-silver ratio, which tracks how many ounces of silver are needed to buy one ounce of gold, has gone from 64 to about 60 in a month, and the spread is expected to keep narrowing.
That's good news for silver miners and royalty companies, with share prices in the sector jumping as much as 70 percent since the beginning of the year.
"Many of those companies have a very good growth profile. In the next two, three, four years, they're going to be producing more metal than they are now," said Bart Melek, a senior economist at BMO Capital Markets. "And there's value to that."
By buying shares in a silver producer with a strong growth profile, an investor is paying a lower price for more metal in the future.
With silver, Melek sees the upside outweighing the risk. He sees spot silver trading at an average of $23 in 2011, up from a estimated average of $18.91 in 2010.
"I think silver will most likely continue to outperform gold," he said.
"Silver benefits from being gold-like and it benefits from being an industrial metal, which I think is going to tighten up the supply-demand balance down the road."
Silver production is expected to be around 23,000 tons this year, with an additional 7,000 tons from recovered scrap.
About half the demand for the metal is industrial, where it is primarily used in electronics. Silver is also used in jewelry, coins and to back exchange-traded products (ETP) and exchange-traded funds (ETF).
A silver-backed ETF is a fund that trades on the stock market and follows the value of silver. It is more secure than stocks because its value is backed by real silver, but there are higher costs because the silver has to be stored.
"Fundamentally we perceive the companies - and that holds for gold and silver producers - as better bets than ETFs," Melek said. "The ETF has storage costs, and all sorts of costs associated with it."
Silver is a unique metal for investors because only about 30 percent of production comes from actual silver mines.
"Two-thirds of silver is mined as a by-product of other metals -- mainly gold, copper or zinc," said Darren Lekkerkerker, a portfolio manager at Fidelity Management. "So if the silver price goes up, but the copper price doesn't go up, they're not going to mine more."
This means that while the demand for silver is hot right now, most miners do not have the flexibility to increase production to capitalize on the high prices.
In fact, major producers like Barrick Gold and Goldcorp don't even process the silver they mine. They simply sell future silver streams to royalty companies for a set price in exchange for cash up front.
It is a model has worked out well for industry leader Silver Wheaton.
The Vancouver-based royalty company, which has purchase agreements with mines in the Americas and Europe, pays about $4 per ounce of silver. The current spot price for silver is about five times higher, at $23.58 an ounce.
"The benefit of owning a royalty company is that they have no exposure to capex and operating cost increases," said Lekkerkerker, referring to capital expenditures.
Shares of Silver Wheaton have risen almost 70 percent since the beginning of the year, opening at C$27.36 Wednesday on the Toronto Stock Exchange.
But royalty companies aren't the only investment opportunity in the silver market.
"Historically the silver market has been viewed as a marginal sector, essentially the poor man's precious metal sector," said BMO analyst Andrew Kaip.
In the past, silver miners were small companies that had to plow all their earnings back into operations each year to maintain production.
Now the companies mining silver are getting bigger, and with the current high selling price, the sector is changing dramatically.
"An entirely different business model is emerging," said Kaip. "Now you're actually seeing a lot of these silver companies looking like they will build significant cash positions."
He points to Pan American Silver as a good long-term bet for shareholder appreciation, and to Coeur D'Alene as a promising option in the next few quarters.
For those willing to take more risk, juniors like Bear Creek Mining, which has risen over 45 percent in the past two months, and Tahoe Resources, which is up 30 percent in the same period, are seen as a good investment.
With the U.S. Federal Reserve signaling that the U.S. economy many need more stimulus, and confidence in paper currencies dipping, investors shouldn't worry that they have missed the boat on silver.
In fact, analysts see plenty of space for silver to continue to gain on gold.
"We're just starting to see the silver equities going the way we thought they would," Kaip said. "I expect that trend to continue - it's still a bright future for silver stocks."
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