Silver Wheaton and the Coming Storm


While the fiscal cliff was avoided in the strictest sense, many of the issues involved heading into the year are far from resolved. Sequestration cuts were delayed, not cancelled, and the debt ceiling is still looming large on the horizon . While the details of the war are different, Congress and the White House are drawing the same battle lines and taking the same stances that technically led us over the fiscal cliff -- a backdated deal was the saving grace . Against this backdrop, the economy finds itself in the same jeopardy that it was a few short weeks ago. Credible estimates suggest that the government will run out of money on February 15 . In this environment, Silver Wheaton remains one of the best ways to protect your portfolio.

The same old song and dance
If you thought Congress was going to learn a valuable lesson from the experience of the near-miss with the fiscal cliff, you would be both in good company and totally wrong. The situation again requires satirical humor, as best explained by Stephen Colbert: "It's like Congress put a gun to the economy's head and swore it will pull the trigger if Congress doesn't put its own gun down." This is how he explained the fiscal cliff and this is how we can understand the debt ceiling.

Yesterday, Jay Carney, White House press secretary, said, "There are only two options to deal with the debt limit. Congress can pay its bills or it can fail to act and put the nation into default." In exchange for agreeing to another increase to the debt limit, congressional Republicans have insisted on significant spending cuts . The White House vehemently contends that it will not negotiate.

Carney further stated: ""The president and the American people won't tolerate congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job." Regardless of your political affiliation, it seems fairly clear that the "job" of Congress is to find a balance between paying for the things we want and funding the things we need. A refusal by either side to compromise is irresponsible, in my opinion.

The political ramifications of doing nothing need to become quickly greater than the ramifications of flinching first. If they don't, we may all find out what happens when the world's largest economy plays chicken with the world's largest egos. My guess is it won't be pretty.

What does this have to do with silver?
Just as the fiscal cliff was expected to plunge the economy in a new recession , if the politicians in Washington manage to shut down the government, the result will be similar. If a recession does hit, commodities, particularly precious metals, should continue their multiyear rally. As the chart below illustrates -- using the SPDR Gold Trust as a proxy for gold and the iShares Silver Trust as a proxy for silver -- both precious metals have performed well for an extended period, although silver has been more volatile. Commodities are widely considered to be an excellent store of wealth and weak economic conditions should bode well.

GLD Chart
GLD Chart

GLD data by YCharts.

On the other side of this argument is the industrial demand that may be created from a period of economic expansion. As fellow Fools Dan Caplinger and Sean Williams point out, the continuing demand for high-tech devices that utilize silver should continue to put upward pressure on silver prices. Silver Wheaton, largely as a result of its superior business model, is highly leveraged to the price of the commodity.

Unlike competitors such as Pan American Silver and First Majestic , Silver Wheaton is not purely a miner but a silver streaming company. Where its peers face increasing environmental concerns, soaring operating costs, and stricter regulations, Silver Wheaton is largely immune from these forces. It contracts with other miners to buy the silver production of those companies at a predetermined and fixed cost. Silver Wheaton then earns the spread between the contract cost and the prevailing market price.

During 2013, the company continued to expand its reach through a new contract with Hudbay Minerals . Under the new streaming contract, Silver Wheaton provided $750 million in a multistaged financing in exchange for the silver production of the 777 and Constancia mines for the life of each. Silver Wheaton also gained rights to the gold production of the 777 mine through 2016. It is arrangements like these that have allowed the company to achieve an average silver cost around $4 per ounce.

Given the uncertainty in the economy and the fact that the company appears poised to perform under a variety of scenarios, the stock, in my opinion, is a buy at current levels. It is trading off of its 52-week high, a return to which would represent a nearly 14% return, and it looks like there is plenty of upside remaining in the name. Silver Wheaton belongs in your core portfolio.

This company continues to provide a unique play on the future of silver. Silver Wheaton has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details about our outlook for Silver Wheaton can be found here in our Motley Fool analyst report.

The article Silver Wheaton and the Coming Storm originally appeared on

Doug Ehrman has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published