PRO PICK - SILVER

With the 2011 roller coaster ride still fresh in most investors’ minds, the question for 2012 is: “So where can I invest while the markets recover and sort their problems out?”

Let’s go back to basics. Commodities are a very good basic investment. We especially like silver. The demand for silver exceeds the supply and is ever increasing. Uses for silver include electronics – silver is the best electrical conductor of all metals and used in conductors, switches, contacts and fuses. It’s also used in the medical industry. Silver is used for its purification attributes in products like wound dressings and other wound-care products, climate control system components, gowns, catheters, stethoscope diaphragms and other medical equipment.

And then there’s air travel – the dry lubricity of silver provides the margin of safety required in giant engines with high-speed parts. The risk of oil interruption and serious damage are reduced. Other uses include brazing and soldering, chemicals (silver is used in products like polyester textiles, mylar tape, and antifreeze coolant), solar panels (cannot be manufactured without silver), water purification, jewellery, batteries, cutlery, coins, etc.

Silver not only has a wide use but is also seen as a safe haven investment. The commodity is getting rarer while the demand is increasing every year. Growing demand with pressure on supply leads to a concluded higher price for this versatile commodity.

So how has silver performed over the past few years? Trading from just below $15 per ounce in February 2007, the commodity has spiked to $49.79 per ounce in April 2011 before pulling back to current figures of around $33.60 per ounce. Like everything else in the market, for every buyer there will always be seller. And yes, there are also some experts that are of the opinion that what has happened with palladium in 2001 will now happen with silver.

The palladium price touched a record high in January 2001 before industrial demand plunged more than 30% over the following two years. After the spike in April 2011, the silver price had also pulled back to its current levels. How much of this decline was due to a drop in demand is still unknown. The industry might be looking elsewhere for alternatives to silver, some have speculated.

There’s a lot of talk in the market that the silver price in 2012 will be the most volatile of all the precious metals. Due to the economic slowdown not much is expected from the industrial demand side making up about 52% of the total demand; the real interest for the next year will be in the investment demand side. Speculators and safe haven investors will probably contribute to most of the volatility.

In the South African financial markets (JSE) silver can be bought via an ETN (exchange-traded note). Standard Bank is one of the service providers that offer investors silver ETNs. The return on their silver ETN over the past 12 months was 29.56%, but as we know, future returns can never be based on past performance.

Some of the questions investors should be asking themselves when investing in silver are:

· How much of the silver price is “manipulated” by investment demand?

· How much of the silver demand will decline due to other alternatives found?

· How much of the silver demand will increase due to new ways to use it?

· How does the supply match the demand currently and forecast for the future?

· How many new mines will come on stream to add to current silver supply?

Balance in investment, like in life, is important. But perhaps investors need to go back to basics when reviewing their portfolios?

Finweek 1 March 2012 Page 36