The iShares Silver Trust ETF: The fund buys and sells silver in an attempt to have it’s share price match the value of its bullion holdings. If the value of the fund’s shares rise, iShares buys more silver. In theory, the fund’s market cap should equate to the fund’s silver holdings (less fees and liabilities).

Sprott Physical Silver Trust ETV: The Sprott trust operates much like the iShares ETF with one major exception, shareholders have the ability to exchange their Sprott shares for physical silver bullion on a monthly basis.

Although they operate similarly, the two ETFs have been on divergent paths year-to-date with the PSLV down 10 percent and the SLV up 4.8 percent. During the same time, the price of spot silver is up 2.54 percent on the year. It’s clear then that while the ETFs are designed to track an underlying commodity, they definitely come with margins of error.

And that’s actually making PSLV look quite attractive. In the past, the fund has traded at a premium of up to 35 percent above the price of spot silver (apparently investors like the fact that their holdings could be exchanged for physical silver). Today, PSLV’s trading at a premium of just 4.95 percent to the silver spot price.

There are benefits to both the ETFs approaches, though. First, the arguments for PSLV:

1) Redemption. Obviously, investors can choose to exchange their shares for physical silver – something that could come in handy if we do experience a currency crisis in the West.

2) Tax perks. If you plan to hold your silver ETF shares for more than a year, you can claim any appreciation as a long-term capital gain. That’s good for a 15 percent tax rate. Profits from SLV will set you back 28 percent under the current tax code.

3) Safety. The Royal Canadian Mint stores bullion for the Sprott trust. As Sprott writes on its web site, “The Mint is a Canadian Crown corporation, which acts as an agent of the Canadian Government, and its obligations generally constitute unconditional obligations of the Canadian Government.” SLV’s bullion is stored and managed by a private company (JP Morgan Chase: NYSE:JPM) with no government backing (unless, of course, you count the tacit promise of a bailout when times get tough).

Now the arguments for the SLV:

1) Low or no premiums. Since SLV doesn’t have to manage the costs associated with fulfilling delivery, the fund’s holdings trade at a much smaller premium to the price of silver. That’s important as premiums are subject to the whims of potential investors. As I wrote above, PSLV has traded with a premium as high as 35 percent above the price of silver in the past. You may as well go buy and store your own bullion at those prices.

2) Higher volume. A lot of silver ETF investors have no intention (or at least they don’t foresee the desire) to redeem their stock holdings for physical silver. For them, buying and selling shares is simply a vehicle to make money. SLV wins out if that’s your goal as the fund is much more liquid than PSLV. On an average day, more than 1.7 million shares of SLV trade hands compared with less than 100,000 shares of PSLV. This makes going both long or short the SLV much easier.

SLV Vs. PSLV: Which one’s better?

Both funds accomplish the same goal: exposure to the spot price of silver without actually buying silver. In the end, then, it comes down to two factors: security and taxes. If you know you’re going to hold your shares for more than a year (which entitles you to tax benefits) and you value the security of knowing your ETF shares can be redeemed for actual silver, buy PSLV. For all other traders, the SLV is perfect.

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In general, I break gold buyers into two camps: defensive buyers and offensive buyers. Defensive buyers are temporarily trying to protect their wealth from effects of inflation. Offensive buyers are the so-called “gold bugs” – the investors who believe that we’re in the midst of a financial crisis that can only be resolved in one way: a string of sovereign defaults. Those offensive buyers don’t plan on selling until we have some new, multi-national gold-backed monetary system.

If we look at gold from the perspective of an offensive buyer, their predictions of $6,000 gold start to make some sense. Here are three reasons why $6,000 gold just might come about:

1) A solid track record. $6,000 sounds like an awful lot of money, but that’s actually just 4 times higher than gold’s current price around $1,590 an ounce. During the 1970s, gold went up 24 times. If we look at gold’s starting point 12 years ago around $250 an ounce and multiply that by 24, we end up at $6,000 an ounce. Gold went up that radically in the past, so it can surely happen in the future.

2) The Dow/gold ratio. Historically, the Dow/gold ratio tends to revert to 2:1. At the time of this writing, the Dow Jones Industrial Average stands at 12,835 and gold’s selling for $1,591. That’s a Dow/gold ratio north of 8. If the Dow were to stay at its current levels (floundering sideways in the years to come), and the Dow/gold ratio were to return to historical means, we’d be looking at gold at $6,000 an ounce.

3) Sovereign defaults seem imminent. It’s hard to believe there are countries with debt that rivals our own, but Greece is under the magnifying glass. The Eurozone “is on a path that leads to eventual dismantling,” Peter Tchir of TF Market Advisors wrote in a note to clients on Monday (per IB Times), and Greece looks like it’s poised to be the first domino that falls. Sunday’s election in the country is still yet to yield a coalition government. That’s prompted warnings from the EU “that Greece would get no more payments from the $170 billion deal approved in March if it did not enact roughly $15 billion in cuts by June” (per USAToday).

If Greece stops getting bailout cash, the country would slide into default within weeks. That might not happen in June, but it seems imminent, and it would certainly raise doubts about the future of the Euro.

If people start doubting the future of a currency, gold will get a shot of adrenaline that’ll push it up rapidly. Throw a few currency defaults into the mix and there are few places besides gold to stash your cash. Viewed in that light, $6,000 gold seems more and more likely.

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And it’s a pattern that gets repeated a lot. I like to use one of the stocks I lost a lot of money on as an example: E-Commerce China Dangdang Inc. (NYSE:DANG) – the so-called “Amazon of China” (even though Amazon operates in China, too). The stock had its IPO on Dec. 10, 2010. It debuted around $32 an ounce. A year later, shares were bloodied. They plunged more than 80 percent to less than $5 a share.

If you would have bought at the start of 2011, though, you’d be quite happy with your returns. Since then, DangDang has shot up nearly 70 percent from $4.40 to $7.45. I think we’re on the verge of something similar happening with Groupon.

Shares in the daily deals site are in the long, painful process of shaking out the weak hands. The question is, when will the real institutional buyers start moving in? I would argue that the tipping point could be coming soon – particularly as a number of investment firms have started moving to upgrade the stock. Here are just a handful of the Groupon stock forecasts for 2012 that we’ve seen over the past month or so:

B. Riley & Co.: Upgrade from sell to neutral. Price target of $10.60 (per Barrons).

Evercore Partners: Upgrade from to equal weight to overweight. Price target of $15 (per Forbes).

FactSet Research: Seven buy ratings and 12 hold ratings. An aggregate price target of $21.44 (per the Wall Street Journal).

Reuters: The average price target of 25 analysts covering Groupon stands at $22.53 (per Seeking Alpha).

Even after an accounting error forced Groupon to revise revenue down $14 million last quarter, it’s hard to ignore the company’s growth profile – and the stock’s subsequently low valuation.

Indeed, Groupon’s valued at “roughly half the multiple that was reportedly offered by Google in which time Groupon tripled its quarterly revenue,” writes Ken Sena, an analyst with Evercore Partners, wrote in a recent research report. It doesn’t make sense then that the company’s more than twice the size it was at the time of offer but somehow worth just half the price.

That’s got me looking for the right time to start accumulating Groupon shares. In the words of hedge fund manager James Altucher, Groupon’s an “easy double” (per Seeking Alpha). I’d like to be there when that double happens.

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1) The Gold/Silver Ratio. The gold:silver ratio has been trending up since early March, and that trend probably won’t stop until the ratio re-tests January’s highs around 57:1. Why? Because swing and momentum traders themselves help cause the fluctuations in the gold:silver ratio. So long as the ratio is showing a clearly defined trend, and it’s not nearing any key resistance levels (or psychological barriers), those swing traders are going to short silver. Check out the steady upward climb in the gold:silver ratio:

[Source: Seeking Alpha]

2) Long live the dollar. The greenback can’t seem to do anything wrong. That’s despite explosive growth in True Money Supply (or the sum total of all the cash, deposits and notes that are floating about in our economy). Just check out this chart from Mises.org:

During ordinary economic times, you could expect the yields on U.S. bonds to spike in the face of such aggressive monetary easing. Instead, the dollar looks stable compared to the financial situation across the pond.

The Eurozone “is on a path that leads to eventual dismantling,” Peter Tchir of TF Market Advisors wrote in a note to clients on Monday (per IB Times). “Greece restructured debt, made different rules for different holders, and yet, the new bonds trade at 20% of par.”

Investors are telling the Eurozone countries that they no longer believe there’s a way out. That threat of a Eurozone breakup has bought the dollar some street cred that it probably shouldn’t have – and that’s bad for silver prices.

3) Even die-hard silver bulls are losing some of their excitement over the white metal. “While I do remain very bullish on silver, I must also admit that for the first time I can envision a scenario in which silver does not reach $100,” writes Simit Patel at Seeking Alpha. His reasoning? Gold will likely outperform everything (silver and stocks) if the equity markets remain soft.

Of course, all of the arguments above have me thinking that now might be the perfect time to buy silver. I’m not alone either. Check out my recent post Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012. Just remember that if you do buy, though, you need to be able to hold onto the metal in the face of near-term weakness. Prices may be higher in three months, but what happens between now and then might not be pretty.

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1) Bet at the track or online. The simplest way is to head to the nearest racetrack, buy a race card and place your bets in person. Typically, you’ll be able to bet on live minor league races that take place at your local track, or you can bet on national races (which are shown on TVs at the track) via simulcast. It’s also legal to bet on horses online in more than a dozen states including California. Some of the leading online horse betting sites include TVG.com, Twin Spires and The Racing Channel.

2) Invest in horse racing-related stocks. There are lot of companies that promise exposure to horse racing – namely through the companies that operate horse racing tracks. One of my favorites is Churchill Downs, Inc. (NASDAQ:CHDN), which runs the Kentucky Derby and recently reported record revenue on the strength on surging growth in its online betting service (at TwinSpires.com). Other horse racing-related stocks include Penn National Gaming, Inc (NASDAQ:PENN) and MTR Gaming Group, Inc. (NASDAQ:MNTG).

3) Buy a horse. Thoroughbreds are bred to do one thing: race. To even buy one, you need to register and be approved as a thoroughbred owner in your state. Once you’re approved, you’ll need to pay annual dues to your state thoroughbred owners association. In exchange, you’ll get the opportunity to bid on thoroughbreds at auction. Once you have one, you can expect to pay about $1000 per month in food and maintenance. On top of that, training costs will start around $2,000 a month on the low end (per Stanley Barton at Seeking Alpha). Investing in quarterhorses is cheaper but the payout is smaller and so is the number of tracks that host quarterhorse racing.

4) “Claim” a horse. One of the ways horse tracks try to ensure that races are fair is by forcing owners to set a “claim” price for their horses. About half of all horse races have a “claim price” a horse owner must agree to before entering his or her horse in a race. If the claim price is, say, $20,000, that means the owner of that horse is legally obligated to sell the horse to any buyer for $20,000 before the start of the race.

“About half of all races at North American tracks are claiming races,” Barton writes. “The claiming price can range from as low as $2,000 to hundreds of thousands, although the majority are between $5,000 and $50,000.”

Interestingly, you must “claim” a horse before the race. If the horse wins, the proceeds go to the current owner, then you get to take the horse home for what you hope will be a bright future full of more racing.

5) Enter a thoroughbred partnerships. Horse ownership partnerships provide a unique way of distributing the high cost of owning and racing a horse. Team Valor is one company among many that offers investors an opportunity to buy an ownership stake in a horse. Team Valor also produced the 2011 Kentucky Derby winner Animal Kingdom. According to the site’s Q&As, the average cost to go in on a horse goes “from a low of $6,000, with a median of $12,500 and as high as $75,000 to $100,000.” Should the horse win a purse, you’ll split the winnings between the six and 12 other investors in the horse.

Horse racing is called the Sport of Kings because it’s anything but cheap. If you genuinely have a love for the sport, though, it’s rewarding even without the prospect of financial gain. Every dollar you earn after that is icing on the cake – and, if you find the right horse – it might make for a lot of icing.

One of the most famous racehorses of all time, Secretariat, brought in more than $145 million in winnings and stud fees starting in 1973. Seattle Slew is estimated to have made north of $200 million at stud after being sold at auction for a mere $17,500, according to Barton. That’s the stuff of legend, and it’s part of what makes investing in horses so tantalizing. Just remember that whether you wind up with a winner or loser, the costs to get your horse to the track are very real.

Horse photo by Danagouws.

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One of the leading voices in this debate is Dr. Paul Walker of precious metals consultancy GFMS Thomson Reuters. At a conference last week in Dubai, Dr. Walker pointed out that it takes some $120-$150 billion of investment demand every year just to keep gold prices flat – not to mention see prices climb higher (per Resource Investor).

That a lot of cash to maintain a baseline, and I would argue that bodes well for silver prices.

“The amount of silver that’s available for investment each year is 450 million ounces and the amount of gold that’s available for purchase is about 70 million ounces, which means you have a ratio of about six-and-a-half to one is amount of silver you can buy versus gold,” Eric Sprott said in a recent interview (per ETFDailyNews).

At current prices, that means investment demand needs to grow by $13.5 billion to keep silver prices where they are. That’s far less than the $120 billion gold prices will need to stay afloat.

Still, silver prices tend to follow gold prices as both metals act as stores of value during periods of inflation. The main indicator for whether or not gold and silver prices can keep up with supply then is the expectation of inflation, and expectations are a fickle thing.

As Dr. Walker pointed out last week, it’s probably not supply that gold and silver investors should be concerned about, but rather the possibility that the Federal Reserve might raise interest rates in an attempt to begin strengthening the dollar. That, he argues, could be the true “Black Swan” event we’ve all been worried about.

We’re not there yet, though. In fact, we just might see all-time record high gold and silver prices again before we ever see the interest rates rise. Check out our posts Silver prices setting up for 30-year high? and Why Eric Sprott believes silver prices will triple to $100 an ounce in 2012 for more.

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Of course, silver is still in the green this year (up 7 percent around $30 an ounce), but it’s hard to argue the fact that investors are giving the metal the cold shoulder. The gold-silver ratio is in a strong uptrend (per Seeking Alpha), investors fear that the Federal Reserve could potentially raise interest rates after the presidential election and silver production is on the rise.

Despite all those factors, Sprott believes both gold and silver prices will hit new highs before the end of the year. It’s silver, though, that he thinks will shine the brightest. And he bases some of his reasoning on data from the U.S. Mint:

“They sold as many dollars of silver as they sold dollars of gold last year in terms of gold coins,” Sprott said during an April 20 interview with Goldseek Radio. “That means that essentially, with silver trading at a 50 to one ratio, people bought 50 times the amount of silver as did they gold.”

Sprott’s arguments for new highs in the silver market can be boiled down to three factors: silver price manipulation, a gold-silver ratio that could start shifting back toward silver and demand that’s out-pacing supply.

Indeed, industrial demand will be key to ever higher silver prices.

“Annual production is about 900 million ounces per year, including recycling,” Sprott said (per Frank Curzio at Stockhouse.com). “Industrial usage alone will rise to 660 million ounces by 2015. That leaves only 240 million ounces for coinage, central bank purchases, and investment.”

Sprott’s prediction makes silver mining stocks look particularly attractive. “If Sprott is right and silver prices begin pushing toward $100 an ounce, these companies (Fortuna Silver: FSM, Silver Standard: SSRI, and Endeavor Silver: EXK) could go up several hundred percent from these depressed levels,” Curzio writes.

Economically, things feel like they’re improving in the U.S., but that’s just smoke and mirrors, Sprott argues. “It’s a BS rally,” he told an investor audience in Toronto last month (per Gordon Pape). “We have a system that is breaking down.”

When that systems starts showing cracks, Sprott believes silver prices will start climbing. And they won’t stop until we hit new all-time highs for silver.

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Now that the hoopla has died down, a lot of investors are acting like the silver story has run its course. Not so fast says Eric Parnell of Gerring Wealth Management. He argues that what’s really interesting about silver’s peak last year is what happened afterwards – namely that prices didn’t collapse entirely.

“Within two months after this previous peak in 1980, Silver lost over 75% of its value in falling back to $11,” Parnell writes. “However, the same fate has not befallen the white metal this time around. While the losses since have been sizeable – it dropped by -30% within the first month after its April 2011 peak and continued lower through the remainder of the year to post a total peak to trough decline of -44% – it has since stabilized.”

Parnell believes that means silver is setting up to break through that $50 an ounce barrier and keep climbing beyond it. Why? If you look at a three-decade chart pattern for silver, it looks like it’s set the stage for a double top:

There’s been a lot of heartburn for silver investors who held onto their metal after the April highs. And yet, it’s important to remember that the fundamental reasons for the surge in prices still remain intact: governments around the world are aggressively printing money to stimulate their economies. In the face of the inflation that creates, investors and individuals have to find ways to protect their wealth. Silver and other hard assets are one of those ways.

It makes sense after all that silver speculators would aggressively sell their metals when prices neared $50 an ounce. They were in the trade for the quick and easy gain. As soon as the metals started poking its head into uncharted territory, those weak hands jumped ship. Now, we’re trading sideways as bargain hunters wait for prices to fall further. Once we see hedge funds moving back into precious metals, expect the frenzy to start again.

Still not convinced that inflation is on its way? Bookmark the Ludwig von Mises Institute‘s web site, and take a peak at their True Money Supply chart every few weeks:

If that doesn’t keep you honest about the state of the dollar, nothing will.

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1) The gold standard helped create the Great Depression. Pegging the dollar to gold led to financial panics during the Great Depression Bernanke argued during a recent speech at George Washington University (per Politico).

“The gold standard would not be feasible for both practical reasons and policy reasons,” he said. “I understand the impulse, but I think if you look at actual history the gold standard didn’t work well.”

I disagree as much of the world operated on some form of precious metals-based monetary standards between the late 1700s and the 1970s. Financial panics occur when the public loses faith in a government’s ability to meet it debt obligations (and it doesn’t matter if that country’s operating with a gold standard or a fiat currency). Rather than a history of failed gold standards, I think it’s more likely that the world will look back on fiat currencies as something that “didn’t work well.”

2) There’s not enough gold to go around. Bernanke claims this is one of the biggest problems with a return to the gold standard. In fact, the move would just require valuing gold at a much higher level. The often-quoted figure is $10,000 per ounce.

3) Less control over the economy. It’s no secret that the Fed uses the dollar as way to manipulate the economy. It gooses a tough economy with easy cash or it caps off a good economy with higher interest rates when it shows signs of overheating. If the U.S. returned to a gold standard, the Fed would no longer have that control.

4) Fiscal discipline would be imposed. Washington’s putting lots of pressure on the Fed to ensure the country can continue offering touch-point social programs: things like Medicare and Social Security. So long as Washington is unwilling to make cuts to those programs, the Fed will have little choice but to keep printing money to pay for them.

5) Gold standards benefit creditors. Gold standards inject price stability into an economy. That means governments can’t “inflate” their way out of debt by printing more “cheap” cash to pay off long-standing bills. Putting the U.S. on a gold standard with a national debt north of $15 trillion would be a form of financial suicide. Bernanke knows that, and the rest of Washington does, too. That’s why they’re publicly lobbying against a gold standard. If another country moves to it first, though, we may not have any choice but to follow.

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Fortunately, I don’t speak from experience, but I have seen the Mint’s ads on television and in magazines. They’re memorable in part because the company makes such a desperate attempt to look and sound like they represent the U.S. government without actually having a thing to do with the government. It’s almost like playing “Where’s Waldo?” Instead of searching for Waldo, though, you’re frantically searching for their disclaimer.

Still, I was content to endure their ads without considering the impact they might have on unwitting consumers until I read a recent Q&A in the Chicago Sun-Times titled “‘You’ve been snookered’ on silver coins purchase.”

In the article, a man who identifies himself as “DA in Troy, Mich.,” writes the paper in desperate need of help. He spent the past 25 years gobbling up “$47,000 in collectable silver coins and beautiful non silver coins from the Franklin Mint for my retirement.”

He did it because he thought “the scarcity and limited edition minting of these coins would drive up their value over the years and because I believed the silver content in the silver coins would also increase in value.” Now, he’s on the brink of retirement, and when he looked into selling the coins to a dealer, got offered $2,500 for the lot.

“DA in Troy” wouldn’t have even gotten offered that much if not for the fact that some of the coins he bought actually had silver in them.

“I don’t know of a single item produced by the Franklin Mint that can be sold today for its original cost,” financial columnist Malcolm Berko wrote in response to DA’s questions. “You overpaid for those coins by orders of magnitude. And you probably paid five or six times the value of the silver content for the silver coins you purchased. So while sliver has tripled in price since 1984, the silver value of those coins is still way less than your cost.”

As for the non-silver coins, Mr. Berko recommends that DA try selling them on eBay where he might get $100. It’s a sad story that reinforces one of our constant themes on this site: always do your own due diligence before making any investment decision. Reading a single blog post (even one of ours) and making a snap purchase of stocks or coins is a fast way to lose your hard-earned cash.

If you’re truly interested in investing in silver coins as a safe haven against an economic meltdown, I’d recommend Silver American Eagles (as sold by the U.S. Mint) or junk silver (pre-1965 U.S. quarters that contain 95 percent silver). Because both are quickly and easily verified as real silver, they’re easy to sell. You’ll pay a slight premium over “spot silver prices,” but at least you can rest assured you won’t end up with a drawer full of junk.

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