-- Posted 7 May, 2009 | | Discuss This Article - Comments:

The stupid way to leverage silver is to go out and borrow money to invest in this highly volatile commodity. A much more sensible approach is to buy silver producers and explorers whose share prices are leveraged against the price of the precious metal.

With silver touching $14 an ounce today, and the cup-and-handle formation in the price charts promising a shift to the upside, there has seldom been a more appropriate moment to consider how best to leverage up on the price of silver.

Ruff’s silver picks

1970’s investment star Howard Ruff puts it succinctly in his little book: ‘These stocks will especially be a license to print money’. The basic premise is that costs for silver producers stay fairly static as the price takes off so the leverage of price against profits is even higher.

Ruff’s list of pure silver mines is fairly comprehensive: Hecla (HL), Pan American Silver (PAAS), Silver Wheaton (SLW.TO), Silver Standard Resources (SSRI) and Coeur D’Alene Mines (CDE).

You have to search further to find smaller silver producers and explorers like Endeavor Silver (EXK) which potentially offer even greater leverage through their ownership of claims, that is the right to explore for silver on land likely to yield new mines.

For in a precious metal boom these claims will soar exponentially in value if past experience is any guide. And it is therefore here that the greatest leverage will be obtained, albeit charlatans also know this and tend to concentrate their promotional activities in this area.

Serious precious metal investors often make a small capital allocation to the junior explorers in the hope of a big upside but only to the extent that this sum will not be much missed if it does not work out.

Volatility

But the problem with silver is the volatility of the underlying metal price. Within the past 12 months it has crashed by over 50 per cent, taking silver share prices even lower.

You need a strong stomach for gains and losses to be a silver investor, and leverage works in both directions, up and down. However, the argument for levering up silver is growing by the day as this precious metal tends to outperform gold in a true bull market.

Thus if gold takes off thanks to the inflation of the global monetary supply - something we do know to be happening and irreversible - then silver will be an even greater beneficiary, and this is the magic bullet for investors in today’s markets. Silver stocks look the pick of moment in this scenario.