Is This the Perfect Silver Portfolio?

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Silver, precious metals

Yesterday, I wrote an article in which I provided a model gold portfolio to investors. The goal of the portfolio was to diversify the various risks to which different gold vehicles expose investors while leveraging exposure to the gold price and providing some income. In this article, I do the same thing for silver.

Different challenges arise when constructing a silver portfolio.

  • There are fewer silver vehicles than gold vehicles, and the silver exposure in the case of many mining companies is diluted by exposure to other metals.
  • Silver miners are having a difficult time making money with the price sitting just below $20/ounce, and this makes a silver portfolio inherently riskier than a gold portfolio.
  • Silver mining is a very small industry, and most of the players are extremely small with market capitalizations less than $1 billion, or even less than $250 million. Investors who want a well-rounded silver portfolio may have to purchase low market cap companies. Those who eschew small market cap companies are extremely limited in the kind of silver portfolios they can construct.

With these concerns in mind, I have decided to include five investments rather than four, which is the number of investments I included in my gold portfolio. When applicable, I will point out when the aforementioned risks apply, and this will give investors the knowledge base needed in order to get the kind of silver exposure that fits their particular risk preferences.

With that being said, this portfolio will still give investors leverage exposure to the silver market, it diversifies risk, and it pays a dividend that yields more than the S&P 500 assuming that each investment comprises 20 percent of the portfolio.

1. The Credit Suisse Silver Shares Covered Call ETN (NASDAQ:SLVO)

This fund is designed to track the price of silver while selling covered calls against its silver holdings. By selling covered calls against silver, the fund is able to generate a significant amount of income — over 17 percent annualized. Furthermore, it offers protection to the downside if the silver price falls considering that by selling calls the fund is effectively taking a small short position against the silver market. This sounds almost too good to be true. The downside is that this fund offers limited upside if the silver market strengthens. By selling covered calls, the fund is giving the buyer of these calls the right to buy the silver holdings from the fund at a fixed price regardless of spot price of silver. For example, the fund might sell a covered call that forces it to sell its silver at $22/ounce even if the gold price spikes to $25/ounce.

That’s bad news if you are bullish of silver. However, the other four holdings I have chosen should perform extremely well if the silver price rises. Thus, this ETF is designed to be a sort of hedge, although keep in mind that it will lose value if the silver price falls, and it will gain value if the silver price rises. It is just that these losses and gains will be smaller than those of the spot price of silver.

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