MARKETWATCH VIEW: Five Reasons Silver Glitters More Than Gold

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There are several reasons to love gold right now. From the twin specters of a
weak dollar and commodity inflation, to the recent all-time highs north of $1,
430 an ounce, to returns that doubled the broader market in 2010.



Yet investors who focus on gold and ignore silver could be missing an even
better bet. Demand and performance numbers show that silver is beating gold
handily right now and has been for a while. What's more, a look at the uses and
possible supply bottlenecks of silver shows that this metal could have an upside
gold may not enjoy in the new year.



While both gold and silver have rolled back recently--a 5% decline for silver
and a 3% decline for gold since Dec. 31--there's no doubt many investors are
considering the drawback little more than a pause before the commodities
skyrocket once more.



Don't be fooled by gold's glitter. Here are five reasons silver may be a
better play for your portfolio, and several investments to capitalize on the
metal's run.



1. Silver's performance



Silver has lapped gold's gains better than three times over the past year,
with appreciation of about 79% compared with 24% for gold. Silver also has
better long-term performance, with three times gold's run in the past 20 years.
Specifically, silver has posted gains of about 637% since early 2009 compared
with 255% for gold in the same period.



Remember, past performance is no guarantee of future results. But a look at
just about any time frame over the past few decades shows that silver has
outperformed gold. Another annual gain of nearly 79% may be a bit unrealistic,
but if you think precious metals are on the rise, you should bank on silver
instead of gold.



2. Silver production bottleneck



According to historic estimates, about a century ago there were about 12
billion ounces of unmined silver. In 1990, commodities research firm CPM Group
pegged that figure at 2.2 billion ounces. But today, that figure has fallen to
less than 1 billion ounces in above ground refined silver--a number that's
shrinking every day. Recycling is common for silver, but the dwindling supply of
metal in the ground is creating a bottleneck.



3. Silver demand increase



What's more, a shift in who owns silver has contributed to a bottleneck.
Stockpiles of silver were for decades largely part of Commodity Exchange
warehouse inventories. COMEX inventories were mostly commercial holdings, with a
small portion being held for investment purposes--peaking at around 280 million
ounces in the early 1990s, according to a report by Ted Butler.



Then a funny thing happened--after the introduction of silver Exchange-Traded
Funds, there was a profound shift in the location and structure of world visible
silver inventories. Rather than being a commercial stockpile, investment
holdings have overshadowed conventional-use silver by 4 to 1.



Given the long-term nature of ETF investment holdings and the current silver
boom, it's highly unlikely this new floor for silver prices will go anywhere.
That skews the chart upward for silver.



4. Silver is useful



Not to get all scientific on you, but silver is an amazing element. The
substance has the highest electrical conductivity of all metals, even copper.
That means it's useful in electronics, from high-end speaker wire to computer
keyboards to circuit boards. Silver oxide and silver-zinc batteries are also
used in many applications due to their long life and impressive energy-to-weight
ratio. In short, you can use silver--and while gold is also highly conductive
and used in a limited manner in industrial and electronic applications, it is
cost-prohibitive and in many ways inferior to the conductivity silver provides.



About 700 million ounces of silver are mined each year, and Silver Insights
figures about 75% of that metal is going to industrial and commercial use--
including 15% to photography alone. Another 20% goes to jewelry and other goods
like silverware. That leaves a mere 5% for coinage, investing and "speculation."
This built-in demand by consumers and businesses provides silver a much stronger
floor than gold in the opinion of many commodity investors.



5. Silver's behavior in the last boom



The last time silver went parabolic was in the inflationary environment of
1979-1980. In the first nine months of 1979, inflation surged to an annualized
rate of more than 10%, thanks to skyrocketing prices of commodities such as oil.
Silver and gold went on a tear as a result.



If you believe that inflation is in the works again due to a weak dollar,
runaway federal deficits and other macroeconomic factors--a common mindset right
now--then check out the peak prices and valuation of silver versus gold during
the last boom:



If you believe the headline dollar amount of the peak, you'll see silver has
some significant room to run above the low $30s. Secondly, if you buy into the
valuations versus gold then silver has ground to make up even if gold flatlines.
Specifically, to achieve a 37-to-1 ratio with gold at current prices, silver
would be priced at $37.50 or so--a 22% upside.



Of course, one person's boom is another's bubble so even if those prices are
achieved you have to know when to say when and bail out at the top. Also,
there's the fact that the Hunt brothers tried unsuccessfully to corner the
silver market 30 years ago and helped make silver's surge even more obscene.



Still, the numbers show silver isn't yet near its historic ceiling when it
comes to raw prices or valuation versus gold. And by the way, these are raw
numbers that aren't adjusted for inflation. Based on that, silver's peak was
actually around $130 an ounce in today's dollars.



How To Invest In Silver



You can buy physical silver coins, of course, but as mentioned earlier, the
affordability of silver means you need a sizeable space to store a sizeable
investment.



Alternatives include physical silver ETFs that track the metal very closely,
including the iShares Silver Trust ETF (SLV) and the ETFS Physical Silver Shares
ETF (SIVR) .



For the aggressive silver buyer, there is a 2x leveraged ETF, the ProShares
Ultra Silver ETF (AGQ) that looks to generate twice the returns (or losses) of
silver prices.



Then there are the silver miners, including pure plays such as Silvercorp
Metals Inc. (SVM) and Pan American Silver Corp. (PAAS) and the Global X Silver
Miners ETF (SIL). There are also diversified miners involved in silver and other
metals including gold and copper, such as Hecla Mining Co. (HL) and Coeur
D'Alene Mines Corp. (CDE).