Polishing Your Portfolio: Is Silver Set for Sweet Returns?

Silver prices have more than doubled since the beginning of the financial crisis in 2008, and analysts say they still have room to grow and could help protect investors' portfolios from market uncertainty.
Silver prices have more than doubled since the beginning of the financial crisis in 2008, and analysts say they still have room to grow and could help protect investors' portfolios from market uncertainty.

Looking for a way to gild your portfolio in this time of continued market uncertainty? Silver, a sometimes-overlooked precious metal, could help protect investors' portfolios whether the economy recovers or not.

Silver counts as a hybrid investment because it's a form of money, like gold, but also acts as a commodity because of its industrial applications. If the economy strengthens, the price of silver should increase as the industrial applications in which it's used -- consumer electronics, medical technology such as X-rays, clothing and more -- ramp up quickly. And if the economy tanks again, investors may well turn to silver as a "flight-to-quality" investment, similar to investments in U.S. Treasurys and in gold.

As the global economic recovery continues, silver already has more than doubled in price since the financial crisis begun in October of 2008. It traded as low as $8.50 an ounce that month and sold for $17.80 an ounce in afternoon trading on July 22. In spite of the run-up in price, some analysts believe the precious metal still has room to grow. It's trading significantly below its all-time high of $50 per ounce.

Continued Growth Expected

Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund (MPDAX), put money on silver about 10 months ago and believes the price will continue rising into next year. While his $385 million alternative investment fund hasn't expanded its position in silver this year, Pursche says silver prices "can easily reach $22.50 over the next year-and-a-half or two, which from current levels represents about 25% appreciation."

He expects that industrial demand for silver, as well as demand for silver as a safe-haven investment, will increase over the next year, causing supply shortages toward the end of this year.

"Silver does have a fair amount of industrial uses, and when we look at those industrial uses and what's happening in Asia and Latin America, we think there is just going to be continued increases in demand," Pursche predicts. "New supply isn't coming onto the market at the same rate that we see demand increasing."

Price forecasts for silver vary dramatically, with several analysts projecting last month that prices would range anywhere from $15.50 per ounce to $22 per ounce through the end of this year and from $14.30 an ounce to $24 an ounce in 2011.

Volatility Warning

But make no mistake, silver isn't gold. Anyone interested in investing in silver should understand that it tends to be more volatile than gold, warns William Rhind, strategic director of ETF Securities, which manages a silver exchange-traded fund (ETF). Silver rises when gold rises and falls when gold falls, but faster.

"If investors are buying gold because they think gold prices are going up, they should at the very least consider silver because when gold prices are rising, silver prices tend to also rise, but they tend to rise faster," Rhind says.

Silver's price has indeed been rising fast, but remember: The price can fall just as quickly. Just prior to its current incline, silver plunged from $21.36 an ounce to $8.50 an ounce in the eight-month period between March and October of 2008.

While the unusual circumstance of the financial crisis seems to have contributed to that major price drop, a similar event could again affect the price of silver in the near term. "Clearly a double dip or downturn in the economy would impact the end demand for silver," Rhind says. In certain conditions, that could counterbalance the potential increase in demand from safe-haven investors.

ETFs such as the ETF Securities USA Silver Trust (SIVR) or the iShares Silver Trust ETF (SLV) could benefit if silver investments take off. (For most people, analysts say it makes more sense to invest in silver through ETFs, which can be bought or sold like stocks, than by buying it in bars or coins, which usually cost a premium that individual investors are unlikely to get back when they later sell.) Website iStockAnalyst.com suggests another, riskier, option: silver mining stocks, such as Pan American Silver (PAAS), Silver Wheaton (SLW) and Silvercorp Metals (SVM).

Originally published