Wednesday, June 10, 2009

How To Profit From Silver

Silver, like gold, is a highly volatile investment with wild swings in value. However if you believe that inflation, or even hyperinflation is likely, then silver may be a good commodity to consider right now. Brian Hunt from Money Morning discusses why silver is a compelling investment right now and how you can profit from it.

Late last month, one world’s greatest speculative profit plays made an important breakout move.

This speculative investment is the tiny group of mining stocks that operate as pure plays on the price of silver.

If investment assets were all patients in a mental ward, bonds would be the guy who sits silently in the corner and stares out the window. Stocks would be the guy who wanders the hall and mumbles to himself. And silver would be the guy they keep in the padded room all day.

And with good reason.

As the chart that follow shows us, silver prices are subject to fast, wild swings - up or down. You see, silver trades a little like a precious metal, meaning that it moves wildly when people get worried about a market crash or inflation. But silver is also an industrial metal, so it can trade up or down in line with changes in global manufacturing activity.

Okay, so you now know that silver can move crazily. Now realize the firms that focus on silver mining are pure madness. Their profit margins and asset values fluctuate with more volatility than silver itself. Take one of the largest and best-known silver companies, Silver Standard Resources Inc. (Nasdaq: SSRI).

When the global credit crunch hit last year, Silver Standard saw its share price plunge from $42 to less than $8 - a drop of more than 75% in just three months. But after investors warmed back up to mining stocks, it took the same amount of time to nearly triple in value.

And that brings us back to the present day.

Just last month, Silver Standard saw its shares blast to a fresh nine-month high. The global economy is getting "less bad" - and the aggressive bailout plans that are being rolled out throughout the world have most smart people scared to death of inflation. That’s driving the price of "real assets" - like silver - to the moon.

So the next time you’re looking around for an "inflation trade," consider going long on a company like Silver Standard - or taking a position in the iShares Silver Trust Exchange Traded Fund (ETF) (NYSE: SLV).

If the government’s “funny-money” scheme turns out badly, these positions have a long history of providing gigantic gains in virtually no time at all.

This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.

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