Last week this column argued that silver would prove to be the best investment for 2007, albeit with the important caveat that you should wait for a buying opportunity in the summer when precious metal prices could bottom out after a spring sell-off in equities and commodities.
But how do you buy and hold silver in your portfolio? With prices hovering around $12.50 per ounce at the time of writing even a weightlifter would have trouble handling a large investment in the physical metal.
But since the advent of the Silver Exchange Traded Fund (SLV on the LSE) investors have an attractive option of holding an inexpensive fund backed by silver deposits instead of accumulating the metal itself. The ETF can be held in an online brokerage account and bought and sold in an instant, for this is a very liquid market.
Commodities' ETFs are relatively new but generally administered by blue-chip firms on recognized exchanges so the systemic risk is minimal, and this is certainly the case for SLV which is run by Barclays. The only risk is in the volatility of the underlying asset, and beware silver prices can be very volatile.
Unfortunately no asset class is without its disadvantages for investors, and with silver volatility is your main problem. Thus you should not put money into silver that you may need to call on, and typically this will restrict asset allocation in any portfolio to 10-20 per cent maximum.
In practice the payback for such volatility will probably be a higher return for patient investors but that is no good if you suddenly want your money back for another purpose and it is not there. Think of silver as a fixed deposit and not a current account.
The other way to hold silver assets and to leverage against a rising price is to hold shares in companies that mine silver. The problem here is that there are very few pure silver mining plays, as most miners that produce silver also produce other metals. But you might like to consider Pan American, Silver Standard Resources and Silver Wheaton as core holdings like Casey Research.
Do not forget that silver is already volatile so to add to that risk by speculating on individual company managements and their skill might be over egging the pudding. Indeed, as with many commodity situations owning the asset itself may provide a similar return without the additional risk profile.
Avoid margin trading
Trading in silver options is for experts and even they will avoid margin because of the volatility factor; this is not for the average investor.
Given that silver already offers what is effectively a leverage position against the gold price that will probably be enough for most investors, who will have to learn to live with some wild swings in value if they want to follow a silver bull market uptrend to the end.
However, when silver prices really roar upwards the fireworks can be very dramatic and outperform gold by a significant multiple as was last seen in 1980. Even in 2006 gold's 25 per cent increase was outperformed by silver's 40 per cent.
Some of the canniest small investors have already loaded up on silver, and should the current bull market in gold resume they will win big-time. But the next buying opportunity will likely be after an equity and commodity correction in 2007.
So why not learn to live with the short-term volatility of silver and hold on for what could be the next Nasdaq-style price boom?