White House Press Secretary Jay Carney accurately described the cuts:
It’s an unfortunate result of the arbitrary, across-the-board nature of the sequester cuts. That was the — I use this term facetiously — the genius in the design of the sequester: It was written in a way to make it terrible. That was the purpose. Republicans and Democrats alike wrote it that way so that it would be so onerous that it would compel Congress to take alternative action to reduce our deficit in a more responsible way.
Of course, the compromise has yet to occur, and this is putting the economy in jeopardy. The Fed’s ongoing course of quantitative easing also means that inflation is a real concern and that much of the stock market rally can be attributed to the defense of risk assets by the central bank. Every rally contains its own special attributes, and this one is no different.
Precious metals are in an unusual position
While gold and silver have typically traded largely in tandem, the industrial aspect of silver is helping its appeal to outpace that of gold. Earlier this week, Barclays Capital lowered its price target on gold from $1,778 per ounce to $1,648 per ounce: “[D]ownside risks to the outlook have risen while upside catalysts have receded. In the U.S., despite headwinds related to the sequestration, retail sales have been strong, and, in turn, increasing confidence in the economy has weighed upon interest in gold.” A critical factor for the downgrade was the outflow of assets from ETFs like SPDR Gold Trust (ETF) (NYSEARCA:GLD), as the firm acknowledges that the “macro backdrop remains supportive for gold.”
On the other hand, in recent years the industrial demand from silver has risen to a range of 550 million to 700 million ounces per year. Industry insiders predict that this demand could rise to as much as 800 million ounces in the immediate term. Relative to available supply, this makes silver an attractive play independent of any safe haven or inflation hedge catalysts. The demand for the silver is outpacing its supply.
If the economy faces the major setbacks that are clearly lurking below the surface, thus making precious metals appealing for wealth preservation, silver still remains more attractive than gold. In a recent webcast, guru investor Jeff Gundlach explained that the “high beta” nature of silver relative to gold made it the more attractive play. Ultimately, while the stock market’s strength has some positive characteristics, silver looks like a smart play at current levels.
Getting silver exposure
The best way to play silver for most investors is probably the iShares Silver Trust (ETF) (NYSEARCA:SLV) ETF, but there are other options. Silver Wheaton Corp. (USA) (NYSE:SLW), the silver streaming company, has a market-leading 800 million ounces of reserves. The company buys the production of various miners at a fixed, predetermined price, giving it significant leverage to changes in the price of silver. Unlike miners such as First Majestic Silver Corp (NYSE:AG) and Pan American Silver Corp. (USA) (NASDAQ:PAAS), Silver Wheaton Corp. (USA) (NYSE:SLW) isn’t exposed to mounting production costs and environmental concerns. Last quarter, First Majestic Silver Corp (NYSE:AG) led the industry in cost control and still faced significant declines. Pan American Silver Corp. (USA) (NASDAQ:PAAS) came under even more pressure with higher costs. Overall, Silver Wheaton Corp. (USA) (NYSE:SLW) and the Silver Trust (ETF) (NYSEARCA:SLV) look most attractive under current conditions
The article Why Silver Is a Better Stock Rally Bet Than Gold originally appeared on Fool.com.
Fool contributor Doug Ehrman and The Motley Fool have no position in any of the stocks mentioned.
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