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Spectator Money - Features

Should you sell the family silver?

The precious metal might be a good bet but antique silver has lost its shine

Now might be a good time to add some silver to your portfolio. Silver is the poor relation of gold in a precious-metals bear market and its rich relation in a bull market, because the metals trade in sympathy with each other but silver is generally a more geared version of gold.

What is likely to drive prices of both gold and silver upwards in the near future is their role as a safe-haven asset class in a continuing negative-yield environment. Central banks have been hinting at rate hikes for the past three or four years, but it hasn’t happened. Markets have stopped believing what one expert calls the ‘spoon-bending’ forward guidance of the central banks. Meanwhile, metals investors observe that central banks — for all their current attachment to ‘unconventional’ monetary tools such as quantitative easing and negative rates — are still cautiously old-fashioned enough to hold more than 18 per cent of their known reserves in gold bars and in recent years have been net buyers of gold.

‘Silver is a sexy version of gold and people are piling in on the long side in the futures and options markets,’ says Ned Naylor-Leyland, manager of the Old Mutual Gold & Silver Fund. ‘Part of me says in the short-term the price is going to correct. Medium-term I don’t think it means anything at all, unless we get more rate hikes than the market expects.’

But there are other elements to the story. Keith Neumeyer, boss of the billion-dollar mining company First Majestic Silver, believes that the mid- to long-term prospect for the silver price is a major uplift. Gold at around $1,270 is currently selling for roughly 75 times (so at the upper end of a historic range of 40 to 80 times) an ounce of silver at $17, but the physical ratio of mined gold to silver is about ten to one. ‘I think that as gold goes higher over the next couple years, the ratio is going to collapse… and that’s why I think we will ultimately see triple-digit silver.’

Shortage of silver supply is already an issue in the electronics industry. Neumeyer was recently contacted by a manufacturer desperately seeking silver. ‘In the 13-year history of First Majestic I have never been contacted directly by an electronics manufacturer for supply… that’s telling me there’s something different going on in the marketplace.’ Furthermore, the US Mint and Canadian Royal Mint suspended sales of silver coins and bars last year because their supply could not match the high demand.

‘There is more potential for a squeeze in the silver market than in the gold market,’ says Naylor-Leyland. ‘With gold, every ounce that’s ever been mined is always available at some price to the market. With silver, it all gets consumed. If there’s a squeeze, industrial users will start jumping into the market.’

So apart from its monetary quality, industrial usefulness is an additional reason to own silver: physical silver, that is. But there are reasons to steer clear of what we might call paper silver in the form of exchange traded funds (ETFs): paper promises to deliver physical silver are no better than paper money when runaway inflation overwhelms an economy. ‘Currently there are are 56,863 open May silver future contracts representing 284.3 million theoretical ounces of physical silver on the Comex [the commodity arm of New York Mercantile Exchange],’ Dave Kranzler of Investment Research Dynamics pointed out late last month. ‘Against this is 31.9 million reported ounces of physical silver in Comex vaults [designated as available for delivery]. In other words, the bullion banks have thrown nearly nine ounces of theoretical paper silver at the market for every ounce of alleged physical silver that could be delivered.’


‘ETFs broadly have the silver they should have, but the issue is to do with claims of ownership that lie within the custodial system,’ says Naylor-Leyland. ‘JP Morgan are the custodians of the big silver ETFs. They also happen to be running a phenomenally leveraged silver trading book. In an environment when people start scrambling at JP Morgan for physical [delivery], what worries me is there are basically 30 Post-It notes on each bar. Who has prior claim?’

But there are other ways of investing in silver. The first is silver mining stocks: Naylor-Leyland recommends Silvercorp, which has mines in China, is listed in Canada and has risen from 80 cents to $3. Another stock he likes is Fortuna, also a Canadian silver miner. But he points out that owning physical silver is a proper systemic hedge whereas owning mining stocks represents ‘a higher risk-reward opportunity’.

$49.45

 

All-time high price of silver per troy ounce in 1980
 

$17.05

 

Price per troy ounce as at 9 May 2016
 

75:1

 

Ratio of gold to silver prices as at 9 May
 

What about silver collectibles? Ryan Powell-Richards of M. Nightingale Ltd (located in the Heart of Hatton Garden market) thinks silver antiques are ‘awful investments’. Ten years ago Georgian silver was the thing to invest in, he recalls, because it was going up. Six years ago it plummeted. Following the Chinese industrial boom, Chinese silver went through the roof ‘because they wanted their history back’. English silver then took a nosedive, because other silver collectors followed suit and bought Chinese instead. The other factor is the scrap price. ‘Today it’s £12 an ounce. Three years ago it was £23 an ounce. If you’re buying silver close to the scrap price you’re investing in a bullion, not in a piece.’

Buying 1oz bullion coins or silver bars is ‘ridiculous’, says Ryan’s father, Mark Powell-Richards, because they cost 80 per cent more than the bullion price. ‘Buy what we call “live”, like a teapot or a tray, because it will cost you 70 per cent less and it’s not pretty. You won’t fall in love with the stuff.’

If you wish to buy silver antiques, Mark Powell Richards recommends arts-and-crafts items with straight lines: ‘People don’t want curly-swirly any – more and they don’t want frills.’ He sees value in good deco makers and Danish silversmiths such as George Jense, Hans Hansen, Michelsen and Lapponia. His son also points to anything made by Sir Christopher Dresser (1834–1904), the father of the arts-and-crafts movement.

Ryan believes it is ‘better to invest in things that you like and stay close to the metal price’. Fifteen years ago he and his father would have paid six times the scrap price for silver antiques. ‘Back then they sold, but I don’t see the desirability of silver antiques coming back.’


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