Get cheap silver exposure with Source ETC

But what a difference a week can make in the world of commodity investing. Precious metal sentiments have shifted, and investors are taking their money out of gold, and into silver.

If you're looking for precious metals exposure in your portfolio, silver could make an attractive longer-term portfolio diversifier as it has a low correlation to most other major asset classes, even though it offers a level of inflation protection.

Exchange traded commodities (ETCs) are a cost-effective way to get some of the shiny stuff in your portfolio. Silver ETCs, which have been dwindling, are now reporting solid inflows. For example, ETF Securities is reporting that its Daily Leveraged Silver (LSIL) has received US$9m of inflows as a result of investors rotating out of gold into silver.

Analysts believe conditions are building for a silver price rally. Demand for silver is increasing rapidly, while supply is short. Bloomberg data from the first quarter of 2014 shows a 22 per cent year-on-year increase in silver imports in China, while every area of silver usage (e.g solar panels, electronics) is expected to increase in 2014, with the exception of photography. Meanwhile, total silver supply is expected to increase by just 0.7 per cent in 2014.

There are only a handful of silver ETCs listed on the London Stock Exchange, but we like the Source Physical Silver P-ETC (SSLV), which, with a TER of 0.39 per cent, is the cheapest silver fund exposure a UK investor can buy.

Source Physical Silver P-ETC five-year performance

Source: Bloomberg

In its relatively short three-year life, this ETC has experienced nothing but cumulative losses. Over three years, it lost 20.22 per cent, and over one year it lost 4.50 per cent, according to Morningstar data to 3 June 2014. But if you believe silver is about to have a good run then don't let this put you off.

It seeks to replicate the performance of the spot silver price through certificates collateralised with physical silver bullion, which is valued daily at the London Fixing Price. Each Silver P-ETC is a certificate which is secured by silver bars held in JP Morgan Chase Bank's London vaults. The vaults are randomly inspected twice a year by independent auditors, who check that the right amount of silver is being stored on behalf of investors.

Unless you are a day trader, keeping it simple with a basic ETC such as Source Physical Silver is a smart move. If you're planning to hold the investment for any longer than a day, you'll be better off with a straightforward ETC than a product with the word 'Leveraged' in the name. Because, while leveraged products can boost your returns, your losses are also multiplied, making them a highly risky and ultra short-term investment tool.

If you're an active investor with a high-risk appetite and an eye to the long term, silver could be a smart investment for a small portion of your portfolio. And there's no more cost-effective way to get it than with this ETC. Buy.

SOURCE PHYSICAL SILVER P-ETC (SSLV) KEY FACTS