Is Silver Really Worth $50 an Ounce?

While $50 an ounce maybe overly bullish, there is plenty of upside to come for silver.

| More on:
The Motley Fool

With Wall Street and institutional investors continuing to place some big bets on precious metals, there are growing calls from some analysts that silver is significantly undervalued and is worth $50 an ounce. This may sound ludicrous to some investors — the metal is now trading at U.S. $21 an ounce — but there is a rationale behind the argument.

There is a strong correlation between gold and silver prices and while gold has rallied strongly this year after seeing its price collapse after the Fed started unwinding quantitative easing at the end of 2012, the price of silver hasn’t kept up. The key driver of this emerging view among analysts is the gold-to-silver ratio, which measures how many ounces of silver are required to purchase an ounce of gold.

At the height of the gold rally in 2011 it took 43 ounces of silver to buy one ounce of gold, but since then the ratio has widened with 63 ounces of silver required to purchase one ounce of gold. But some analysts are claiming the gold-to-silver ratio has historically required 20 to 25 ounces of silver to purchase one ounce of gold and believe prices will adjust to reflect that historical ratio.

I am not so bullish on silver, though there is clearly plenty of room for silver prices to run and I would expect to see the ratio close to below 50.

With gold currently at around $1,290 per ounce, the narrowing of the ratio to 50 would see the price of silver jump a hefty 29% to approximately $26 per ounce. Such a significant spike in the silver price would be a boon for battered silver miners who have been feeling the wrath of the market as precious metal prices plummeted.

How do investors take advantage of rallying silver prices?

Investing in silver miners is essentially a leveraged play on silver and offers investors potentially higher returns than investing in the physical metal or an ETF like the iShares Silver Trust (NYSE: SLV). This is because the majority of their costs are fixed and already priced into their operations.

But which silver miners are the best bets for investors?

Billionaire investors George Soros and Ray Dalio have placed some big bets on precious metals streamer Silver Wheaton (TSX: SLW)(NYSE: SLW), while Soros has also placed a bet on Pan American Silver (TSX: PAA)(NYSE: PAAS).

Both represent solid opportunities for investors with Silver Wheaton being a favourite among institutional investors and Wall Street. Although with an enterprise value of 21 times EBITDA it does appear expensive, whereas Pan American Silver is still attractively priced with an EV of nine times EBITDA.

This is also one of the lowest-cost silver miners with first-quarter 2014 all-in sustaining costs of $15.54 per ounce compared to First Majestic Silver’s (TSX: FR)(NYSE: AG) $18.71 and Silver Standard’s (TSX: SSO)(NYSE: SSRI) $17.42 per ounce. But these costs are higher than Endeavour Silver’s (TSX: EDR)(NYSE: EXK) $12.15 for the same period.

These low all-in sustaining costs will allow Pan American to take full advantage of the spike in silver prices and generate a healthy margin per ounce produced, despite full-year 2014 production expected to remain flat.

Pan American Silver also pays a dividend with tasty yield of 3.4%, which is one of the best among precious metal miners and three times higher than Silver Wheaton’s. This dividend will also continue to see patient investors rewarded while the price of silver appreciates.

I believe it is overly bullish to think silver will hit $50 per ounce, but if the correlation between gold and silver prices returns to where it was at the height of the gold rally, there is significant upside available to investors. This upside will translate into solid improvements in the operations of silver streamers and miners with Silver Wheaton and Pan American Silver being the best picks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. Silver Wheaton is a recommendation of Stock Advisor Canada.

More on Investing

Silver coins fall into a piggy bank.
Tech Stocks

How to Turn a $500 TFSA or RRSP Into $50,000

Are you looking to convert a $500 TFSA into $50,000? A little discipline and patience can help you achieve it.…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

5 Things to Know About Cannabis Stocks Before 2023

Cannabis stocks like Canopy Growth (TSX:WEED) are struggling, but there are positives to draw on as well.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Stocks for Beginners

3 Best-in-Class Stocks to Build Long-Term Wealth

Looking for stocks that might create generational wealth over the long term? Here's a top growth, value, and income stock…

Read more »

TFSA and coins
Dividend Stocks

TFSA Couples: How to Invest for $777 of Passive Income Each Month

The TFSA or Tax-Free Savings Account can be used to buy and hold a portfolio of blue chip dividend stocks…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Investing in the Stock Market Could Turn Your $1,000 Into $100,000: Here’s How

The stock market can convert a $1,000 regular investment into $100,000 without making too risky bets. Here’s a simple strategy…

Read more »

Bank Stocks

3 Top Stocks to Buy Now in a Once-in-a-Decade Opportunity

Given their discounted stock prices, these three quality stocks offer a once-in-a-decade buying opportunity.

Read more »

Various Canadian dollars in gray pants pocket
Stocks for Beginners

Here’s an Absolutely Brilliant Way to Earn Passive Income

Here’s a simple and unique way to earn passive income that does not involve working more, buying a property, or…

Read more »

Make a choice, path to success, sign
Stocks for Beginners

Canadian Investors: 2 Once-in-a-Generation Buying Opportunities

You can grab these two once-in-a-generation buying opportunities in Canada right now to get super rich in the long term.

Read more »