Silver investing gains popularity when gold prices rise, but do you know how to invest in these stocks properly?
Silver attracts a lot of interest as gold prices reach levels that seem too expensive for the average investor. Silver is sometimes known as “poor man’s gold” because of this.
Silver investing is best done through silver mining stocks or ETFs. To profit in silver mining stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
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How to undertake silver investing conveniently
If you want to invest in silver, we think the best way to do it is through silver mining stocks or ETFs. We recommend staying away from silver bullion, certificates representing an interest in bullion, and other silver bullion alternatives, such as so-called “junk silver” coins (these are common coins with no numismatic value that trade strictly on their silver content).
Exchange traded funds (ETFs) have gained popularity among investors in recent years, mainly because they offer low management fees. This includes ETFs that hold gold and silver stocks. We recommend some of these in our Canadian Wealth Advisor newsletter.
Ways to make silver investing profitable
- High-quality silver mining stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
- We think you should avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
- We always look at the market cap of silver mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. We like a silver mining stock’s market cap to be no more than half the value of the silver. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the silver mining stock’s market cap, it provides a margin of safety.
- We generally stay away from silver mining stocks that operate in insecure and politically unstable regions.
- We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
- Look for steady production. Some of the most highly promoted mining stocks are penny stocks which have yet to produce. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.
- Be careful when investing in a new issue of a silver mining stock. If they lack sound operating history, or a strong management team, you may be wasting your money.
Look for longevity in reserves for silver investing success
When you invest in any resource stock, silver included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.
Seek high average daily trading volume in top mining stocks
This is one positive factor to look for when picking junior mining stocks. The more actively traded junior mines are, the more liquid they are, which makes them easier to dispose of when it’s time to take profits.
Lowering your silver investing risk
We continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established mining companies with high-quality reserves. And as mentioned, resource stocks should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as much as 30% for an aggressive investor.
While we think you should maintain some exposure in resource stocks, you should still aim for balance among most if not all of our five main economic sectors: Resources & Commodities, Finance, Manufacturing & Industry, Utilities and the Consumer sector. You should always resist the temptation to load up on mining stocks, no matter how attractive they appear. If the market does go into a downturn, these stocks could suffer more than average.
If someone offered you $1,000 of silver or $1,000 of gold which would you take and why?