Silver mining stocks and silver ETFs are a better way to invest in the precious metal than silver bullion.

Silver is sometimes known as “poor man’s gold,” because silver attracts a lot of interest as gold prices reach levels that seem too expensive for the average investor. But prices of silver mining stocks tend to rise along with gold prices. That’s because when gold prices soar, investors see silver as less of an industrial commodity and more as a precious metal. Silver mining stocks tend to also follow the price surge.

Investors looking to invest in silver mining stocks may want to look into silver ETFs, as well. These include exchange traded funds that are made up of top silver mining stocks. An example is an ETF we cover in our Canadian Wealth Advisor newsletter—Global X Silver Miners ETF (symbol SIL on New York). This ETF tracks the Solactive Global Silver Miners Index, which includes between 20 and 40 international companies that explore for and mine silver.

Exchange traded funds (ETFs) have gained popularity among investors in recent years, mainly because they offer low management fees.

However, you should always keep in mind that not all exchange traded funds are created equal. For example, there are a lot of ETFs that have been created to tap into popular, but risky, themes and fads. So you need to be very selective with your ETF holdings.

Exchange traded funds are set up to mirror the performance of a stock-market index or sub-index. They hold a more or less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index. ETFs trade on stock exchanges, just like stocks. Investors can buy them on margin or sell them short.

Conservative investors should be careful when making silver mining stocks and ETFs, as you would be with any volatile commodity investment. Further, silver mining stocks should only make up a modest part of the resources segment of your portfolio.

Convenient ways to invest in silver mining stocks

If you want to invest in silver, we think the best way to do it is through silver mining stocks or ETFs. We recommend staying away from silver bullion, certificates representing an interest in bullion, and other silver bullion alternatives, such as so-called “junk silver” coins (these are common coins with no numismatic value that trade strictly on their silver content).

For example, a member of Pat McKeough’s Inner Circle recently asked us about the iShares Silver Bullion ETF (symbol SVR on New York).

iShares Silver Bullion ETF aims to replicate the performance of the price of silver bullion, less the fund’s fees and expenses.

Commodity investments like these do not generate income. Instead, they come with a continuing cash drain for management, insurance and so on.

However, we told our Inner Circle member that if they do want to hold silver bullion, the iShares Silver Bullion ETF is a relatively low-cost and liquid way to do it.

8 ways to profit from silver mining stocks

1. To profit in silver mining stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
2. High-quality silver mining stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
3. We think you should avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
4. We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
5. Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
6. We generally stay away from silver mining stocks that operate in insecure and politically unstable regions such as the Congo and Venezuela, or in countries with little respect for property rights and the rule of law such as Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
7. We always look at the market cap of silver mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. We like a silver mining stock’s market cap to be no more than half the value of the silver. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the silver mining stock’s market cap, it provides a margin of safety.
8. Be careful when investing in a new issue of a silver mining stock. If they lack sound operating history, or a strong management team, you may be wasting you money.

Have you invested in silver mining stocks or ETFs in the past? Have they been profitable for you? Share your experience with us in the comments.