Several reasons exist 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 12/31 — 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.
Silver Performance, Both Recent and Long-Term
Silver has lapped gold’s gains better than three times over the last 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 last 20 years. Specifically, silver has posted gains of about +637% since early 2009 compared with +255% for gold in the same period.
|Range||1YR Gain||3YR Gain||10YR Gain||20YR Gain|
Remember, past performance is no guarantee of future results. But a look at just about any time frame over the last few decades shows that silver has outperformed gold. Another annual gain of nearly +80% may be a bit unrealistic, but if you think precious metals are on the rise, you should bank on silver instead of gold.
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
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 (ETFs), 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.
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.
Silver’s Behavior During 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 vs. gold during the last boom:
|Date||1/4/2011||1980 high||1980 avg||1979 avg|
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 vs. 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 $37.52 — 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 vs. 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 in Reason No. 4, the affordability of silver means you need a sizeable space to store a sizeable investment.
For the aggressive silver buyer, there is a 2x leveraged ETF, the ProShares Ultra Silver ETF (NYSE: 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 (NYSE: SVM) and Pan American Silver (NASDAQ: PAAS) and the Global X Silver Miners ETF (NYSE: SIL). There are also diversified miners involved in silver and other metals including gold and copper, such as Hecla (NYSE: HL) and Coeur D’Alene (NYSE: CDE).
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter at http://twitter.com/JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.