Since peaking in 2011, precious metals have fallen off the cliff and silver has been leading the decline. Year-to-date, silver has lost an incredible 35%, shedding more than 12% in just one week in April. In fact, silver has lost so much glitter that it is now cheap, and over the long run it is an almost-perfect contrarian play. These low prices have created unique opportunities to buy silver and silver miners at rock bottom prices.
Silver prices slated to recover
There are four reasons to believe that the price of silver has bottomed and is on the way up:
- Industrial demand. Silver can withstand high temperatures, is an excellent conductor of heat and electricity, and is very malleable. This makes it an ideal material for a wide range of industrial applications, ranging from electronics, to batteries, to superconductors, and even to medicine. The Silver Institute estimates that the demand for industrial silver will reach a new record high in 2014.
- Jewelry. Globally, jewelry manufacturers use twice as much silver as gold and the demand is expected to continue strong as the worldwide economy recovers.
- Emerging markets. Silver demand is surging in India since the government placed restrictions on the import of gold. China demand for silver has grown by over 100 million ounces over the last decade and is likely to continue to increase.
- Silver Coins. Investors are snapping up the American Eagle silver coins as fast as they can be minted. The US mint sold a record 24 million ounces of silver coins during the first half of 2013, causing the mint to temporarily halt sales because it ran out of silver bullion!
Easy way to buy bullion
One of the easiest ways to cash in on the potential silver bonanza is to buy bullion by purchasing iShares Silver Trust (ETF) (NYSEARCA:SLV). One share of this ETF tracks the price of one ounce of silver bullion. The shares are backed by silver held in banks in London and New York. This fund is very liquid (average 12 million shares per day) and has an expense ratio of only 0.5%.
Silver stocks will rocket higher
As silver recovers, silvers miner prices will rocket higher even faster than bullion. I have identified three miners that are highly leveraged to the price of silver. These firms are described below and all of them should benefit greatly from higher silver prices.
Low-cost producer
Hecla Mining Company (NYSE:HL) has been in operation for more than 100 years and is one of the lowest-cost producers. In 2012, according to its annual report, it produced 6.4 million ounces of silver at a cash cost of $2.70 per ounce. Its Green Creek mine in Alaska is one of the largest and lowest-cost mines in the world.
Hecla Mining Company (NYSE:HL) is also making substantial capital expenditures to upgrade the Lucky Friday mine in Idaho. Hecla Mining Company (NYSE:HL) expects to increase production to 15 million ounces by 2017. Hecla Mining Company (NYSE:HL) has a price-to-book of only 0.8 and price-to-sales is only 3.1. With $191 million in cash and no debt, Hecla Mining Company (NYSE:HL) offers growth at bargain-basement prices.
Top silver producer
A good dividend payer
In 2012, Pan American Silver Corp. (USA) (NASDAQ:PAAS) produced a record amount of silver (25.1 million ounces) and gold (112,000 ounces). Despite this record performance, shares declined 21%! Pan American Silver Corp. (USA) (NASDAQ:PAAS) has mines in the United States, Mexico, Peru, Bolivia, and Argentina, with proven and probable reserves of over 317 million ounces of silver (plus 2.4 million ounces of gold).
It is developing the Dolores mine in Mexico, which will be one of the longest-life, lowest-cost mines in the world, at a cash cost of $2.25 to $3.50 per ounce of silver. Pan American Silver Corp. (USA) (NASDAQ:PAAS) has a price-to-book ratio of only 0.7 and price-to-sales ratio of 2.0. With over $500 million in cash and virtually no debt, it is poised to leap higher as silver recovers. And as a bonus, you receive a tremendous 3.8% dividend while you wait.
Foolish bottom line
Silver is at the beginning of a long-term bull market as demand outstrips supply. This is not a sector for the weak-hearted, but if you can tolerate the ups and downs an investment in silver will almost surely reward the patient investor.
John Dowdee owns shares of Hecla Mining Company, Coeur d’Alene Mines, and Pan American Silver. (USA). The Motley Fool has no position in any of the stocks mentioned. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Bargain Silver Stocks, 1 ETF to Buy Now! originally appeared on Fool.com is written by John Dowdee.
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