A Silver Lining in Global Markets

Like the late Rodney Dangerfield in the comedy world, silver is the metal that “gets no respect.” It trades at a fraction of its distant cousin gold. It lacks the ornamental cachet of platinum. Widely used in photography, technology, defense, and electronic industries, this "poor man’s gold" seems more "industrial" than "precious." It was even outshined by gold in investment returns during 2007, as gold finished up 28% while silver added only 18%.

Yet, on the supply side, silver seems like it’s a one-way bet. According to research consultancy CPM, there were 12 billion ounces of silver on the planet in 1900. Today, this number has fallen to 300 million ounces — a drop of 97.5%. As a result of low silver prices over the course of the 1990s, mine production of new silver rose only 4% from 1990–1999, while demand increased by 22% during the same period. Silver did not shoot through the roof because of a drawdown of accumulated stockpiles, which flooded the market with the metal. Now that this selling has dried up, argue the silver bulls, silver’s price can head only in one direction. Above-ground silver supply is projected to shrink to a critically low level by 2010.

On the demand side, improved technology has reduced demand for silver in both jewelry and photography. But industrial demand in the electronics sector, combined with metal and coin fabrication businesses, has taken up the slack. New industrial uses for silver are consistently being developed, including uses as divergent as a catalyst in fuel cells for electric motor cars, high-temperature superconductor wires, and an anti-microbial agent.

But aside from being a solid, long-term bet, silver also is a terrific short-term trading play. In times of troubles, commodities such as silver (and gold) gain a shine they don’t have when times are good. As banking woes mount, real estate deflates, and inflation in commodities and energy remains at record levels, silver is regaining its status among investors as an inflation-proof currency that has never lost its value in 3,500 years.

Trading at barely 30% of its previous record level of $49.50, silver also is one of the very few commodities that has yet to trade at record levels. It is relatively cheap compared with its more high-profile cousin gold. The current price of gold is roughly 52x that of silver. If silver returns to the historic average of 15x — you will have made about 3.5x your money. And that assumes that the gold price stays at its current level — an unlikely proposition. Some silver bulls predict the metal will rise 10x from its current levels between now and the end of the commodities supercycle around 2015.

So buy iShares Silver Trust (SLV) — an ETF whose share price is equal to 10 ounces of silver — at market today. Place your stop at $142.50. Sadly, there are no options on this one.

PORTFOLIO UPDATE

Your existing bets on the agricultural commodities boom continue to be the top performers in your portfolio, with the PowerShares DB Agriculture (DBA) hitting record highs last week. DBA itself is up 12.84%, and the options now are up 59.32%. Although last week’s bet, the iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA), ended the week flat, it is set for gains in coming weeks.

Our two currency bets, the CurrencyShares Japanese Yen Trust (FXY) and our short position in the CurrencyShares British Pound Sterling Trust (FXB), are broadly flat. But the British Pound fell sharply over the weekend after the U.K. government nationalized Northern Rock, the United Kingdom’s equivalent to Countrywide Financial. It was the first nationalization of a significant British bank in a quarter of a century.

Your position in the UltraShort FTSE/Xinhua China 25 Proshares (FXP) continues to behave in ways that seem completely unconnected with the performance of the iShares FTSE/Xinhua China 25 Index (FXI) it is purportedly shorting on a 2x basis. FXI is down about 20% during the past three months. FXP should be up 40%. Yet it’s only up by single-digit percentages. I’ve discussed this situation with several other players in the marketplace, and no one seems to have gotten a satisfactory answer from ProShares. I will be contacting company officials this week to follow up on this issue. It is highly frustrating to make the right call, but not to have the underlying instrument deliver the promised results.