“It is not the case that we are seeing the bursting of a bubble in precious metals,” says Nick Barisheff, president and CEO of Toronto-based Bullion Management Group Inc. , the sponsor of two mutual funds holding physical bullion. “The fundamental drivers behind rising bullion prices are not changing, including the widespread printing of money by governments and a loss of confidence in the ability of governments to manage debt.”

The price of silver, often described as the “poor man’s gold,” reached almost US$50 an ounce this spring as investors — anxious about growing sovereign debt globally and a weak U.S. dollar — turned to precious metals for refuge. A subsequent correction in the fast-moving commodities sector later took silver down to around US$33/oz.

But the price has recently perked up to US$40/oz. due to a rekindling of investor nervousness about global money woes.

The result is that global investment demand for silver has been surging, with money flowing into silver-based exchange-traded funds such as those sponsored by Toronto-based Claymore Investments Inc. , as well as U.S.-based iShares Silver Trust and ETFs Silver Trust. In the first week of May, iShares Silver Trust was the most highly traded security on the planet.

Also popular are silver-related closed-end funds, such as Toronto Stock Exchange-listed Central Fund of Canada Ltd. and Sprott Physical Silver Trust, which is managed by Sprott Asset Management LP of Toronto.

Unlike gold, silver is used in a wide variety of applications, including industrial activity, photography, jewellery and tableware. Silver is a critical ingredient in electrical switches, cellphones, computer keyboards, automobile dashboards and the control panels on household appliances. Silver’s weight and resistance to corrosion has made it a store of value throughout history — and it was one of the first metals to be used as a currency. However, surging investment demand is what has fuelled the bullion’s recent price.

Bullion Management’s BMG BullionFund is invested equally in physical gold, silver and platinum. Barisheff says all three metals have acted as money during the course of history, but there are much smaller above-ground stocks of silver and platinum than gold at the moment, so both silver and platinum are likely to outperform as demand outstrips supply.

Physical bullion is the purest way of investing in silver. Bullion bars can be purchased at any major chartered bank, although Toronto-based Bank of Nova Scotia does the highest volume. Bullion bars can be either stored in a bank’s vault or the client can take possession of them. However, if bullion is not stored in regulated vault facilities, it may require retesting and recertification before being sold.

For clients looking to buy small amounts, Scotiabank’s precious metals division, ScotiaMocatta, has launched an online precious metals e-store. Products include certificates, gold bars of up to five oz., silver bars of up to 100 oz., and gold, silver, platinum and palladium coins such as the silver Canadian Maple Leaf and silver American Eagle. Clients are limited to purchases of $9,500 a day.

Sprott Inc. of Toronto also has launched an online store called Sprott Money Ltd. that sells coins, small bullion bars and wafers.

Similar products are also available from online stores sponsored by Kitco Metals Inc. of Montreal.

As well, the Royal Canadian Mint sells a few products online, including collector coins.

Although silver bullion certificates may be more convenient than actual bars, some experts say they are not as secure. A certificate is merely a paper promise to deliver, and the actual bullion might not be available in the event of a buying panic that could deplete the institution’s supply or in an extreme crisis in which the assets of a financial institution are frozen.@page_break@However, unlike physical bullion, paper certificates qualify for registered plans such as RRSPs, as do units in bullion mutual funds, ETFs and closed-end funds.

Mutual funds such as BMG BullionFund and the newly launched Sprott Silver Bullion Fund are a convenient way for clients to hold physical bullion. The bullion is properly allocated and stored, with holdings adjusted daily according to fund sales and redemptions. Fund units are purchased and redeemed daily at net asset value by the fund company, providing daily liquidity.

Both Sprott Physical Silver Bullion Trust and Central Fund also are backed by actual bullion. Unlike mutual funds, these closed-end funds have a fixed number of units that trade on a stock exchange. The unit price is influenced by the bullion price, as well as by investor demand for the units; units may trade at either a premium or a discount to the bullion’s value. In the event of a stock market buying binge or selling panic, the trading price of a closed-end fund unit could vary significantly from the underlying bullion’s value.

For example, due to high investor demand, the premium on Sprott Physical Silver Bullion Trust has been as high as 25% of NAV since the units were introduced last autumn due to strong interest in silver. Currently, that premium stands at 20%.

Your clients should pay attention to the additional costs charged by the various investment vehicles on top of the bullion price, says David Franklin, president of Sprott Private Wealth LP, a division of Sprott Inc.: “The spot price of bullion is only the beginning. Investors must also consider trading costs, management fees and other premiums. The closer you get to physical silver, the better.”

For example, mutual funds, closed-end funds and ETFs all charge management fees. There also are storage costs and transaction fees involved in purchasing bars and coins. Silver coins are usually sold at a high premium to their actual bullion values.

ETFs are highly liquid and convenient for clients who want to speculate on bullion price movements or trade frequently. The three derivatives-based silver ETFs, sponsored by Toronto-based BetaPro Management Inc. , offer the opportunity for non-leveraged exposure to silver price movements based on COMEX futures contracts, as well as for 200% leveraged exposure on either the short or the long side through BetaPro’s bull and bear silver ETFs.

Individual mining stocks are another way to invest in silver, although these don’t always move in step with the bullion price and can be affected by a variety of business factors, including management ability, hedging practices, labour costs and stock market emotions.

Mutual funds investing in precious metals stocks are a way to get exposure to a diversified portfolio of silver and gold companies. There are fewer pure silver-mining plays available than for gold, as silver is usually produced as a byproduct when companies are mining for other metals such as gold or copper.

“Rising bullion prices are encouraging exploration,” says David Chapman, advisor and technical strategist with MGI Securities Inc. in Toronto, “and a lot more junior companies are going to market for financing. But it can take 15 years from the time a drill is put in the ground until a mine comes into production.

“The upside can be exciting,” he continues, “but these companies are not for the faint of heart — and they can get badly beat up during market corrections.” IE