Precious metals ETFs: the silver lining

One of the few clear winners to emerge from the credit crisis are the precious metals. Nick Sudbury looks at the burgeoning range of options for ETF investors

The only asset class to benefit from both the credit crisis and the policy response of quantitative easing has been the precious metals. Unlike paper currencies gold cannot be debased and offers a store of value that can withstand just about any shock to the financial system.

Last year was a strong one for the markets with the extra liquidity from the Fed pushing up asset prices across the board, but once again the storm clouds are gathering. The main threat is an escalation of the European sovereign debt crisis, although the weak dollar, a possible slowdown in the US economy and higher global inflation all represent significant risks in their own right.

Given the gloomy outlook it is little wonder that investors have sought protection by diversifying into gold. According to the World Gold Council, at the end of March the collective volume of metal held by global ETFs was a colossal 2,100 tonnes.
At time of writing gold was trading well in excess of $1,500 an ounce. In sterling terms it is up around 11% over one year, with investors enjoying a three year gain of 110% and a five year return of 198%.

Out of the shadows
Silver doesn’t normally attract the headlines in the same way as gold, but it has actually eclipsed its more valuable rival with sterling based investors enjoying a 73% gain in the last year. The cumulative returns over three and five years are even more impressive at 156% and 296% respectively.

Silver is a very different market to gold with a lot of the demand being industrial. This explains why in the second half of 2008 the global recession knocked it down below $10 an ounce. There was then a steady recovery to July 2010 whereupon the market went berserk. In just a few months it shot up from less than $20 to almost $50 and then back down to $35.

Nick Brooks, head of research at ETF Securities, says that silver is far more volatile than gold and behaves like a hybrid of a precious and industrial metal, so when the lead economic indicators improved last year it prompted a strong rise in the price.

“The sharp fall this May was largely driven by a substantial increase in the margin requirement for the COMEX silver futures contracts. This is expressed as a fixed amount rather than a percentage of the value and didn’t reflect the strong gains in the market last year.”