SLV and mining stocks are of course interrelated in that the miners won’t thrive without a strong silver price. But in isolation SLV is a direct play on the price of silver, whereas the mining stocks are leveraged plays on the profits of the miners.
SLV and mining stocks also sport vastly different risk profiles. SLV is inherently risky being pegged to a small-market volatile commodity. But the mining stocks carry silver’s innate risk and company-level risk. When you add operational, geological, geopolitical, and other risks that mining companies bear, you’ll find that mining stocks carry much higher risk.
I really believe that the majority of investors who own SLV would not be invested in this sector at all if this ETF didn’t exist. It’s not a matter of SLV’s shareholders choosing this ETF over mining stocks. It’s SLV, or nothing silver-related. Besides, it’s a different class of traders who choose mining stocks.
Those of us who traffic in the mining-stock realm have a greater appetite for risk, of course with the hopes that there will be much greater rewards. These stocks offer huge positive leverage to silver, which over the course of silver’s bull has led to legendary gains. Even in silver’s latest upleg, the mining stocks easily outpaced SLV.
If anything SLV has made things better for the miners. There’s no denying SLV’s big role in rising silver prices. And these higher prices allow the miners to generate higher margins. SLV is a win-win for miners and investors.
And not only do I not believe that SLV is cannibalizing mining-stock capital, I don’t believe it cannibalizes retail physical investment either. Prudent investors realize that SLV should never be used as a substitute for owning the metal in one’s physical possession (which at Zeal we’ve long recommended as a foundational component of one’s portfolio). SLV is a neat vehicle that has added an entirely new component to silver investment and speculation.
At Zeal we’ve been huge silver proponents since this bull’s beginnings. And we certainly endorse SLV to risk-averse and new-to-silver investors, as well as traders playing the options markets. But when silver prices are going up, we definitely prefer the huge potential offered by the mining stocks.
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The bottom line is SLV has grown to become a force in the silver world. This unique ETF offers stock investors an unprecedented opportunity to trade, and effectively own, one of the most exciting commodities out there. And its popularity has made SLV a vast storehouse of wealth that has had a major impact on pricing.
Though SLV hasn’t actually taken much silver off the market over the last year and a half or so, there is no denying its impact since inception. And when silver starts to rock once again, SLV ought to see a healthy flow of stock-market capital that will boost its holdings while accelerating silver’s momentum. SLV is a great option for investors, and it offers a bridge to the more dynamic mining stocks.
Scott Wright is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Wright is a lifelong contrarian student of the markets who lives for studying and trading them.