Investment Guide to Silver

Contents 3

An Introduction to Silver

4

10 Reasons to be Bullish on Gold and Silver





A Silver Buying Opportunity



Ian Williams, fund manager of the Way Charteris Gold and Precious Metals fund explains why he’s optimistic about the future price of gold and silver

6

How to Invest in Silver



Silver is being touted as having the potential to deliver great returns following recent falls. By Chris Menon

11

Macro Clouds Bring Silver Opportunity

14

Terms You Should Understand



ETF Securities’ director of research in the US talks silver with Chris Menon

4

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Editor

AN INTRODUCTION TO SILVER

Chris Menon

A Silver Buying Editorial Director Nia Williams

Deputy Editor Shelly Ford

Reporter

Charlotte Lloyd

Business Development Manager David Castenada

Every Investor, Fergusson House, 124-128 City Road, London EC1V 2NJ This Every Investor guide is for information purposes only and neither The Publishing Group Ltd nor Every Investor shall be held responsible for any errors, omissions or inaccuracies within it. Any rules or regulations mentioned within the guide are those relevant at the time of publication and may not be the most up-to-date. Neither Every Investor nor The Publishing Group endorse any of the products or services that appear on it or are linked to it and are not liable for any action that you may take as a result of the content of this guide, or losses or damage you may incur doing so. There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions. Not all companies or products mentioned in this guide are necessarily regulated by the Financial Conduct Authority and, as such, you may not have access to statutory or regulatory protections such as the Financial Ombudsman Service and the Financial Services Compensation Scheme.

Opportunity For those wishing to diversify their investments, precious metals is an obvious asset class to consider. Gold is often the preferred option and silver has been overlooked as a result. Indeed, silver only fairly recently came onto my radar as a potential investment option. It’s surprising really, given the fact that silver has been used as coinage for thousands of years and will long outlast the US dollar. Having fallen roughly 60% from its highs silver is an attractive, if contrarian, option. I base this on the premise that high levels of private debt are unlikely to guarantee a sustained economic recovery over the medium term. As a result quantitative easing, which has already effectively debased many national currencies, is likely to continue. Cheap money and market manipulation by central banks (and investment banks) means that risk has been mispriced, and led to asset inflation. As people realise this they’re increasingly likely to seek out hard assets such as silver. In addition, other demand factors and supply constraints should also play in its favour. These are reasons to invest in silver. But what is the best way to actually do so? When researching into silver, prior to buying some silver coins, I was surprised how little practical information was readily available to those who might be considering investing in silver. I hope this guide goes some way towards rectifying that. All the best, Chris

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

August 2014 | 3

10 Reasons to be Bullish

on Gold and Silver

Ian Williams, fund manager of the Way Charteris Gold and Precious Metals fund explains why he’s optimistic about the future price of gold and silver

W

e believe that the evidence to support the view in favour of buying gold and silver assets is more compelling than at any time since the mega bull 20-year cycle began in 2002. Here are ten reasons why:

1. The gold and silver 10-10.5 year cycle bottomed in June 2013 - this cycle is now in up mode. Our target is for silver to hit US$150 an ounce (current price $21). Our target is for gold to reach $3500 an ounce (current price $1300). 2. Gold and silver miners are at 30-year relative cheapness to other sectors of the equity market. While every other sector has recovered, miners are still at their post 2008 price level. 3. Gold and silver miners are at 30-year relative cheapness to gold and silver bullion itself - probably 50 years - but the XAU Gold share Index only dates back to 1984.

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4. The gold forward offered rate (GOFO) is negative, meaning gold is in ‘backwardation’. This effectively means that someone is willing to pay interest in order to borrow gold, using dollars as collateral. It is important because it shows that a higher value is being placed by the market on gold in hand versus dollars in hand. This happens very rarely (3 times in the past 20 years) and signals the market is very short of physical gold. 5. Daily trading volume in gold and silver miners has exploded as the market has rallied - 400% up on the last half of 2013, when these share prices were being depressed by US tax loss selling as investors sought to minimise capital gains tax: this is a very bullish sign. 6. Record speculative shorts on COMEX in both Gold and Silver Futures; these will have to be eventually covered, that is, bought back.

10 REASONS TO BE BULLISH ON GOLD AND SILVER

7. Massive Asian buying of gold continues unabated. China and India now consume 90% of global gold mining output on their own - this is unprecedented. The chart below illustrates this.

“Gold and silver have now completed their corrective wave and are now breaking up through the long term trend line. As the corrective wave was down the impulse wave will be up.” 9. US selling of gold and silver ETFs has now dried up. Such selling (700 Tonnes of gold ) was a major cause of the 2013 fall in the gold price.

8. Newly printed money via quantitative easing (QE) is starting to enter the real economy and drive up asset prices. As it does so, ‘real’ assets are now showing large gains - land, paintings, wine and so on.

Gold and silver have now completed their corrective wave and are now breaking up through the long term trend line - see the chart on silver below. Corrective waves are followed by Impulse waves (sharp moves up or down). As the corrective wave was down the impulse wave will be up (like the impulse wave in 2010).

Other commodities are starting to show huge gains: for example, coffee is up 90% over a 5-month period, Nickel is up 90% over a similar 5-month time span. London property prices are up 20% year-on-year but there are also similar conditions in San Francisco, New York and so on.

“Gold and silver are the ultimate ‘real’ assets: they will have to join in at some stage.” Japan’s Inflation is the highest for 30 years - 1% inflation going forward is unlikely.

10. The gold price is currently below its replacement cost of around $1500 an ounce. At this level no new mines will be built. Eventually, this will have a selfcorrecting effect on the gold market by pushing the price up.

Gold and silver are the ultimate ‘real’ assets: they will have to join in at some stage.

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How to Invest in Silver Silver is being touted as having the potential to deliver great returns following recent falls By Chris Menon

August 2014 | 6

S

ilver tends to perform well during periods of quantitative easing, and market turbulence, as investors search for a hedge to currency depreciation.

Currently, investors as diverse as Jim Rogers and Charteris fund manager Ian Williams are bullish on its prospects. Indeed, Williams believes it will rise from its present US$20 an ounce to $100-$150 within 2-3 years. The problem with it has traditionally been its volatility but with the price currently depressed, this could well act in its favour. Although it has to be borne in mind that while investors wait for it to rise it offers no income. Here are five ways to gain exposure to the commodity.

1. Buy coins or bars Many favour buying coins or bars as the safest way to gain exposure to silver, hedge against inflation and diversify against other asset classes such as equities and bonds. Investing this way is deemed to have no counter-party risk. That is, you won’t be affected by the failure of an exchange if you hold the metal yourself. Physical silver, as it’s known, can be bought through bullion dealers. You can buy either coins or bars, known as ingots. Whatever you buy remember that retail customers pay a premium over the ‘spot’ price, or market price. It’s also worth shopping around as the price differs widely.

HOW TO INVEST IN SILVER

Coins One ounce silver coins (such as the American Eagle, Canadian Maple Leaf or the British Britannia) are a popular way to invest in silver coins. Although coin collectors also buy pre1947 UK silver coinage (such as shillings, sixpences, florins) to get silver at almost scrap metal prices. According to Michael Burrow, an executive at ATS Bullion, the Britannias tend to be most popular among private investors: “Britannias are technically legal currency in the UK and are therefore free of capital gains tax, while Eagles and Maple Leafs aren’t.” This benefit doesn’t come cheaply, though. At ATS Bullion the premium you pay for a Britannia is approximately 60% over the spot price (including VAT). You should certainly avoid buying brand new Britannias from the Royal Mint unless you want to pay an even higher premium over the spot rate.

Bars/Ingots Alternatively, you could buy ingots of the precious metal, which have a purity of 999 parts per 1000. Silver bars come in different weights (such as 100 gramme and 1000 gramme bars). At ATS Bullion the premium on a 1 kilo bar (32.15 troy ounces) is 30% including VAT.

Bullion dealer Baird sells its own brand 1 kilo bar for a premium of 7.5% over the spot price, although it only buys back at 97.5% of the spot price. For ten 1 kilo bars the premium falls to 4.3% over spot. Although you’ll have to pay 20% VAT on top. Should you wish to avoid paying VAT, you can buy bars and leave them in its vaults. It offers an allocated account where bars can be stored and insured for investors spending a minimum of £5,000 for an extra 0.75% a year. According to a spokesperson, the beauty of an allocated account is that it’s not classed as an asset on the bullion bank’s balance sheet. If you buy a single ingot offshore in Guernsey from BullionRock invest you can avoid paying VAT entirely and buy for around 8% above the spot price (this percentage varies as it is calculated as a fixed premium above spot), although if you bring it back to the UK you’ll then be liable for VAT. If you are storing silver with them you can invest in 30kg silver bars for 2% above spot, or 1kg bars for 4.5% above the spot price. If you wish to sell a bar back they will purchase for 98.75% of the spot price, provided your bar is from the Metalor refinery. Metalor is on the ‘Good Delivery List’ of precious metal refiners that are approved by the London Bullion Market Association (LBMA) for delivery of large gold or silver bars. BullionRock also offers a trading account for bigger investors. Put in a minimum of £10,000 and you can buy and sell silver. There is no upfront cost for opening an account while storage is 0.5% a year, with a minimum of $10 a month.

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Bullion.

Let’s get physical...

Many advisers and investment commentators acknowledge that gold has a fundamental part to play in most asset allocation strategies; it can help to increase diversification, reduce the impact of tail risk events and enhance liquidity. ETFs? Futures? Funds? Mining shares? Why not just hold the real thing?

What are the benefits of owning physical bullion? • It is a "pure play", giving the closest possible correlation to the underlying commodity • There is no counterparty risk • Complete price transparency • Deep liquidity • Gains on UK bullion coins minted post 1837 are currently exempt from CGT • Allocated investment gold bullion is eligible for SIPPs, SSASs etc • No VAT on purchases of physical bullion held in our vaults.

How can we help you? • A wealth of experience spanning the investment & bullion markets • A very competitive pricing structure for the investment community • Low cost, fully insured & highly secure storage facilities • We hold a vast selection of low premium, internationally recognised coins • Wide range of bars & coins available in Silver, Gold, Platinum, Palladium and Rhodium • Individually numbered bars - the ultimate in secure, segregated ownership.

With over 40 years' experience, Baird & Co. are the only refinery member of the London Bullion Market Association and the London Platinum and Palladium Market to offer refining and investment facilities to private clients and institutional customers.

For more information on our range of services, please contact our sales team, or visit our website:

Tel: 020 7474 1000 • [email protected] • www.goldline.co.uk August 2014 | 8

HOW TO INVEST IN SILVER

All the silver is held in an ‘allocated pooled’ account. The vault is audited by an independent inspection team every quarter – just to check there are as many bars in the vault as there should be. If you wish to take physical delivery in Guernsey you can. Moreover, your funds can be repatriated without paying VAT on any purchase. However, if you invest in silver bars do remember that you are still liable for any Capital Gains Tax on your profits. Moreover, should a bullion bank go bust you won’t be liable for compensation under the Financial Services Compensation Scheme. Sam Schofield, head of trading at BullionRock, keen to reassure investors on this point, comments: “At no time are our clients assets at risk. A nominee company is used to hold the client cash and assets, meaning they are never on our balance sheet as a business, and legal title is the clients – they own the assets, our business does not. This means if we go bust those assets are not at risk. This removes the need for any compensation scheme.” Certainly, whether you choose coins or bars storage costs, and associated risks, have to be factored into the cost of keeping this asset, as will insurance. Among UK banks Metro do offer safe deposit box which starts at £120 a year. Alternatively, you could keep it at home and buy a rottweiler.

2. Exchange traded commodity Another way to gain exposure to silver is by investing in an exchange traded commodity (ETC), whose performance is linked to the metal’s price. They come in two forms, synthetic and physically-backed ETCs. Most advisers recommend that you avoid the synthetic ETCs, which use swaps to replicate the performance of the metal, exposing the investor to a high degree of counterparty risk. As no ETC can exactly match the performance of the metal it tracks, it’s important to see how closely it follows the benchmark. Tracking error measures this volatility. The lower the tracking error, the more closely the ETC matches that of silver. According to Shakhista Mukhamedova, a fund analyst with wealth manager Brewin Dolpin: “Net asset value (NAV) tracking errors for physicallybacked ETCs are typically low and reflect management fees. However, price tracking errors can be a bit more volatile as they are affected by the supply/ demand dynamics in the market.

Total expense ratios They also have low management fees as Mukhamedova explains: “total expense ratios (TERs) for physically-backed ETPs ranges from 39bps to 66bps, while TERs for currency hedged are up to 85bps (0.85%) for physicallybacked products.” Brewin Dolphin recommends ETF Securities Physical Silver ETC. This physically-backed product has a TER of 49bps, tracking error of 2bs and a tight bid-offer spread of 3bps. There will also be a broker fee to pay, which should be similar to that for a regular share transaction. Most ETCs can be held in an ISA or SIPP.

“Brewin Dolphin recommends ETF Securities Physical Silver ETC. This physically-backed product has a TER of 49bps, tracking error of 2bs and a tight bid-offer spread of 3bps.”

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HOW TO INVEST IN SILVER

3. Precious metal funds

4. Miners

Much less risky than investing in an individual miner is to invest in an actively-managed fund. Such a fund can offer diversification across a range of mining companies. The fund with the greatest exposure to silver is the Way Charteris Gold & Precious Metals Fund, with 70% of its investments in silver.

Those with an extremely-high risk tolerance could invest in silver miners, but be warned: they are often exposed to significant geo-political, operational and currency risks.

Darius McDermott, managing director of Chelsea Financial Services, recommends both the Way Charteris Gold fund and Smith & Williamson Global Gold & Resources fund for silver investments, the latter has only 16% in silver. He commented: “One of the golden rules of investment forecasting is to make a prediction on either the price or the date but never both. In November 2012, my favourite precious metal bull, Ian Williams, manager of the WAY Charteris Gold Fund, was bold enough to break it. He predicted that silver was about to enter a sustained bull market (within a wider precious metal bull market) that would take the price from its then current level of $32 an ounce to $165 an ounce by October 2015. Silver has had a bad couple of years though, and has seen its value fall rather than rise. So it’s safe to say that the bull market has yet to begin. I’ve been tempted by both silver and gold shares myself, and thankfully have made monthly savings rather than lump sum investments, so the volatility hasn’t hurt too much. Long term I agree with Ian: it is very difficult to see any other asset that holds as much upside potential.”

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Two popular names that are often mentioned in this area are Fresnillo, a Mexican company listed on the London Stock Exchange, and Hochschild Mining, a Peruvian silver producer. Their prices have both declined appreciably over the past year. Alternatively, you could buy a silver streaming company. As these buy the long term production of different mines at a fixed price and sell it on at the market price, they’re not exposed to the costs associated with producing silver. In a bull market they go up less than a miner, but in a bear market they’d go down less. One such company, held in the Charteris fund, is Canada-listed Silver Wheaton.

5. Futures This is the most risky and dangerous form of investing in silver used by sophisticated investors to use leverage for large returns (or losses). Investors can buy or sell a contract to bet on the near term direction of the silver price. Spread-betting, options and contracts for difference can also achieve the same ends. However, given the volatility of the silver price and the potential for catastrophic losses this is far too speculative for all but the high rollers of the investment world.

Protection The Financial Services Compensation Scheme (FSCS) provides protection where a product is classed as a designated investment. You can download its guide here. ETC, Funds and Futures would be covered if an investor was badly advised by an IFA. The FCA website has a register of firms and individuals who they regulate. You can find them on its website, here.

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Macro Clouds Bring

Silver Opportunity ETF Securities’ director of research in the US talks silver with Chris Menon

M

ike McGlone is director of research in the US for ETF Securities, which deals in Exchange Traded Products. Here he answers a few questions about silver.

Chris Menon: What are the drivers of the price of silver? Mike McGlone: Demand is increasing rapidly. First quarter data on China demand showed a 22% year-onyear increase in silver imports, the largest quarterly gain since the second quarter of 2010. China demand through May showed a 16% increase year-on-year. Every major area of silver demand is expected to increase in 2014, with the exception of photography. In 2014, the amount of demand for silver used in solar PV panels is expected to equal the demand for photography for the first time. Exemplifying the changing demand landscape for solar, in some parts of the world, solar power is near parity on a cost-per-watt basis with conventional forms of electricity production. This trend is likely to accelerate in our view, and more so as electricity storage technology improves, notably with potential help from people like Elon Musk and his plans for battery giga factories. Silver for solar will likely consume about 78 million ounces of silver in 2014, or 8% of total demand including investment, up from less than 1% in 2007 (CPM Group estimates). Fabrication demand in 2013 increased the most since 2000. The single largest category of demand for silver is for jewellery and silverware, making up about 31% of fabrication demand and 27% of total demand and investment in 2013.

Total fabrication demand increased 6.3% in 2013 to 866 million ounces, led by jewellery, silverware and solar. It was the largest percentage increase in fabrication demand since the year 2000. Compare this to mining supply of 741 million ounces, which increased 4.1% in 2013. Recycling and inventory depletion are therefore necessary to meet the supply and demand imbalance in the silver market. A key question is, was 2013 a one-off or is it potentially the beginning of a trend? In our view, the longer-term demand trend is likely to accelerate, based notably on global per capita income and GDP growth, rapid electronisation and more recent investment trends in silver. The CPM Group expects fabrication demand to increase about 3% in 2014.

“Was 2013 a one-off or is it potentially the beginning of a trend? In our view, the longer-term demand trend is likely to accelerate” Investment demand continues to grow. At the end of 2013, the total holdings of silver in ETPs (exchange traded products) stood at 623 million ounces, which although was down about 2% from the peak, was the greatest year-end amount ever for silver ETP’s holdings. Although gold ETP holdings have declined about one-third from the peak at the end of 2012, silver investors in coins, ETP’s and jewellery have been much more resilient.

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Macro Clouds Bring silver opportunity

Chris Menon: How volatile is the price of this metal? Mike McGlone: History indicates the recent decline in silver price volatility to the lowest levels in over a decade (at the beginning of May), as measured by 30-day volatility, may be a precursor to a strong price move. In our view, downside risk is limited with industrial demand picking up and supply in decline. With the silver price less than half its 2011 peak and futures shorts already elevated, we believe the next strong trend price move is likely to be up. Silver - a leveraged play on gold. Silver prices have a history of moving with a higher volatility than gold but with a high correlation. Among all precious metals prices, the correlation between silver and gold is the highest. From January 2000 to April 2014, the gold silver correlation was .75. Gold’s average annual volatility was 17.5% compared to 32% for silver (measured on a monthly basis). On a volatility weighted basis, silver has moved approximately 1.8 times gold, thus it has offered a similar exposure as gold but with more return (and loss) for a given level of investment. From 1971 to 2013, the beta of silver to US CPI was 9 compared to about 5 for gold (measured annually). When gold is the main price driver, as measured during the top 20% and bottom 20% of gold return months from Jan 2000 to April 2014, silver has moved on average 1.4 times gold. When silver is the driving force, it has moved about 2.4 times the price of gold, as measured by the top 20% and bottom 20% of silver months.

“With the silver price less than half its 2011 peak and futures shorts already elevated, we believe the next strong trend price move is likely to be up.”

Chris Menon: How has it performed during periods of QE? Also in periods of low/high inflation? Mike McGlone: From 1971 through 2013 when annual CPI has been 4% or higher, silver has increased on average 29%. The highest inflation year was 1979, when CPI increased 13.3% and spot silver increased 437%.

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QE periods

Begin

End

Spot Silver Change

1

Nov-08

Mar-10

77%

2

Now-10

Jun-11

40%

3

Sep-12

Present

-40%

From 1971 thru 2013, when annual CPI has been below 4%, silver has increased on average 8.6%. Chris Menon: If an investor wishes to invest in a physical silver ETP what would you recommend and why? Mike McGlone: Silver ETPs can take two forms – physical or non-physical. Physical products attempt to provide investors with a return equivalent to the movements in the silver spot price (less management and storage fees). Non-physical (swap-based) products track indices that are constructed to simulate a continuous exposure to silver futures returns. It is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to silver futures returns, the returns will include the benefit (if the curve is in ‘backwardation’) or cost (if the curve is in ‘contango’) of rolling futures to maintain exposure to silver futures returns. At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or frontmonth futures price. Most ETFs are governed by laws regulating collective investment schemes known as UCITS. However, UCITS mandates require diversification. Therefore, a singlecommodity physically backed ETP would not qualify for a UCITS and so a physically backed silver product would be designed as an exchange traded commodity. ETF Securities offers a number of silver ETPs including ETFS Physical Silver (PHAG) which has over US$400 assets under management. Chris Menon: What are the management fees/broker fee and tracking error on these? Mike McGlone: ETFS Physical Silver has a 0.49% management expense ratio (MER).

Macro Clouds bring silver opportunity

Chris Menon: Is there any other advice you’d offer an investor considering whether to buy silver? Mike McGlone: In our view, the silver price is potentially poised for a strong upward move. Supply and demand indicators are turning price positive. Increasing demand from China, increasing investor demand and strong fabrication demand are being met with falling supply and dwindling inventories. The gold price decline last year weighed heavily on silver due to its high correlation to the metal and its much higher volatility.

However, we believe the gold price has found a bottom and this weight should be removed from silver’s performance in 2014. Unlike gold, above ground available supplies of silver have been declining for years as fabrication demand has increased. The recent rise in US and China industrial indicators, a clearing of silver longs in the futures markets and elevated shorts increases the likelihood of a short covering rally that potentially sparks a more sustained upward rise of the silver price.

Terms You Should Understand Gold/Silver ratio:

COMEX:

This is the number of ounces of silver that can be bought with one ounce of gold.

COMEX is the primary market for trading metals such as gold, silver, copper and aluminium.

Troy ounce:

Contango:

The traditional unit of weight used for precious metals, which was attributed to a weight used in Troyes, France in medieval times. One troy ounce is equal to 1.0971428 ounces.

A situation where the future price of a commodity is above the expected future spot price.

Unallocated account:

When the future price of gold is less than the spot price.

An account where specific bars are not set aside and the customer has a only general entitlement to the metal. This is the most convenient, cheapest and most commonly used method of holding metal. The holder is an unsecured creditor.

Spot price:

Allocated account: This is an account that is opened when a customer requires metal to be segregated and needs a detailed list of weights and assays. It is generally preferred to an ‘unallocated’ or ‘pooled’ account.

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Backwardation:

The current market price.