Silver ETFs: Not Shining in 2012
May 23rd 2012 at 6:00am by Tom Lydon
Physically-backed silver exchange traded funds have given back most of the gains made in 2011, and have been negative most of 2012. As many major governments have taken value from currencies, a precious metals fund can still give a portfolio protection.
“Unlike equities or bonds, commodities are non-earning assets whose value comes only from what another party is willing to pay. While investing in silver is not a priority for everyone, it has its uses in a dollar-based portfolio. Silver can retain its purchasing power under strong inflationary pressure. On the other hand, increased dollar strength can detract from silver’s value as investors are able to buy more metal with each bill,” Abraham Bailin wrote in a recent Morningstar article. [Silver ETFs Hit Resistance at 50-Day Average]
Since commodities such as silver are generally uncorrelated to the stock and bond markets, they still serve as diversification tools. Unlike paper currencies, silver is not at the mercy of government policy. Because it cannot be easily issued or mined, its value won’t decrease overnight as a currency might if the government were to significantly expand the monetary base, reports Bailin. [Gold, Silver and Miner ETFs Fall in Risk-Off Trade]
However, silver has various applications as an industrial metal, so the hedging properties of the commodity are not as strong as gold. Be aware that if companies use silver in their manufacturing processes and scale back production, silver prices are likely to suffer. [Silver ETFs Fall on Fed, QE3 Outlook]
The iShares Silver Trust (NYSEArca: SLV) has lost about 12.1% over the past month, and the Global X Silver Miners (NYSEArca: SIL) has lost 20.4%. Traders Huddle on Seeking Alpha reports that the latest risk-off environment has even tossed gold to the sidelines, and if gold does not advance, it will remain hard for silver to reverse course.
iShares Silver Trust
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own SLV.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.