Why invest in or own silver shares?
Why invest in or own silver shares? This is probably the first question the potential silver investor will ask after reading or hearing that silver shares or silver share investing is the only form of paper silver that we at Silver Bullion condone or tolerate as far as a secondary investment in silver goes.
Physical silver remains primary for us due to several reasons, but we can understand if the silver investor, especially when already heavily invested in physical silver, wishes to enter the more risky world of paper silver as a secondary means of investing in or owning silver. The primary reason silver shares or silver share investing is the only form of paper silver we condone or tolerate, although we believe all forms of paper silver present unacceptable risks, is due to the fact that silver mining companies need funds and capital to deploy in the various stages of silver mining operations. Yes, funds and capital, commonly known as finance, can be obtained from various sources (banks, governments, etc.), but silver investors or shareholders (stockholders) mostly definitely play an important part when it comes to financing silver mining operations. We are of the opinion that all other reasons must be seen as secondary:
Value sensitive to silver price: The value of silver shares is believed to be highly sensitive to any fluctuations in the silver price even more so than the case is with silver bullion bars (silver bars). The high sensitivity of the value of silver shares to fluctuations in the silver price, is simply due to the fact that the valuation of silver shares are based on the following: 1. Expected profits during the life of the mine, 2. which are depended on the silver reserves, 3. and the silver mining production costs in relation to the expected value of the silver extracted (which is indicated by the silver price).
In other words, if the silver investor seeks to make an investment in silver that is really closely linked to volatility in the silver price, then it’s probably best to invest in or own silver shares. Needless to say, investing in silver mining companies can offer high potential returns, but the investor needs to have an appetite for the higher than normal risks associated with silver mining, coupled with extreme fluctuations in the silver price, mainly due to silver market manipulation and the “paper gimmick.”
The ‘gearing effect’: The ‘gearing effect’ is in reference to the effect that is created when the share price of a silver mining company increases in reaction to an increase in the silver price (assuming that the productions cost and all other factors stay the same).
For example: Let’s assume a silver mine has a 1 million ounces of silver underground that still needs to be extracted and that the silver price is currently at $35.00 per fine ounce of silver. In addition, let’s assume the current production cost is $10 per fine ounce of silver. In other words, the mine is estimated to make $25 million over its life. Now let’s assume the silver price goes up to $42 per fine ounce of silver and consider the effect this will have on the profits made by the mine. The profits made by the mine will shoot up to $30 million (assuming that the production cost and all other factors remain constant). Given the ‘gearing effect’ of 4 times in this example, an increase of 20% in the silver price will lead to an increase of 20% in the share price plus another 4 times 20%, in other words 100% (assuming that the production cost and all other factors stay the same).
Although the above scenario is almost never the case in reality, because production cost for one doesn’t stay the same, the ‘gearing effect’ can lead to tremendous paper profits for the silver investor who chooses to invest in silver shares. Unfortunately, the contrary is also true. The investor’s whole investment in silver shares might be wiped out if the silver price falls, especially when it happens rapidly. This is another reason why an investment in silver shares or silver mining shares is not designed for the faint-hearted, but rather for those who can afford to risk losing money.
Portfolio diversification: Despite all the risks attached to silver mining companies, silver share investing offers a great opportunity to the silver investor who wishes to diversify his/her investment portfolio, especially when he/she can afford to do so. This is called portfolio diversification or risk management.
Excitement: It can be quite exciting to invest in silver mining companies, especially considering that silver shares can be highly volatile in terms of share price movements. The moment positive indicators start to surface that push silver share prices upwards… the silver investor will most definitely feel an adrenaline rush… and if he/she manages to sell a portion of his/her silver shares fast enough to seal in a hefty return or profit, he/she is definitely going to be in the 7th heaven. Of course the tide can turn against the silver investor and wash him/her out on the shore, but even then it won’t be a train smash, provided that he/she is not over invested or over exposed. The secret is not to bet your house on silver mining companies, but to rather have only a relatively small amount invested in silver mining companies at any given time. If you invest in such a way, the downside is limited to the relatively small amount invested, but the upside can be almost UNLIMITED.