Silver’s a worthy gold rival

Silver has been proving itself as an important investment even though it may not be considered as valuable as gold. This metal doubles as both a precious metal and a industrial metal and has been considered the "poor man's gold" because it is about 40 times cheaper than gold.

July 22, 2011, 12:01 a.m. EDT
By Myra P. Saefong
MarketWatch

SAN FRANCISCO (MarketWatch) — Silver has always been seen as less precious than gold, but it has certainly proved itself worthy of investors’ attention — and demand for it as a hedge against the world’s financial woes is likely to grow.

Year to date, silver prices have gained about 26%. Gold’s 12% rise pales in comparison.

The white metal is also 40 times cheaper than gold. It doubles as both a precious and industrial metal and most of the silver used in industrial applications is consumed rather than recycled.

Silver is known as a “poor man’s gold,” so as gold prices rise and begin to price out many investors, “silver becomes a good and cheaper alternative,” said Mark Leibovit, chief market strategist at VRTrader.com.

Silver hasn’t managed to garner the same attention, or prestige, as gold, but there are some tell-tale signs of growing investor interest in the metal.

World investment demand for silver climbed to 279.3 million ounces in 2010, up around 40% from 2009, according to data from metals research consultancy GFMS. That compares with a rise in industrial demand of about 20%, to 487.4 million ounces in 2010 from the year before.

And the Hong Kong Mercantile Exchange announced that it will launch U.S. dollar-denominated silver futures contracts on Friday. It cited “surging global demand for silver” as the reason for the launch, pointing out that silver demand rose 67% in China between 2008 and 2010, with the nation accounting for nearly 23% of the world’s silver consumption last year.

As many investors have learned — when China, the world’s second largest economy, buys, the world tends to follow. Read about China’s impact on gold.

“The rising Chinese demand of gold and silver is one of the reasons why we continue investing in these metals, even at today’s prices, coupled with the fact that underground reserves that can be mined at reasonable costs have become fewer and harder to find,” said Martin Hennecke, associate director at Tyche Group in Hong Kong.

On Monday, gold futures GC1U -0.0062% climbed to a record high above $1,600 an ounce, while silver futures SI1U -0.49% topped $42, their highest level since May. Read about Monday’s metals action.

“Silver is sort of a leveraged play on gold, so if there is a bullish move in metals, it could shoot higher than gold,” said Tom Lydon, president of Global Trends Investments and ETF Trends Publisher, but it can also fall harder in a gold selloff.

Silver has dropped around 20% from its late April levels near $50 an ounce even as gold continues to hit record levels.

That drop is due largely to the CME Group Inc.’s CME -0.30% hikes in margin requirements for silver futures in the spring. Margins are money investors put up to be able to trade a futures contract and increases in them tend to force small investors to liquidate positions.

“Silver is always more volatile than gold, both up and down,” said Adrian Ash, head of research at BullionVault.com, an online service for gold-bullion trading and ownership. “For investors looking to play off or defend against monetary mayhem, silver or gold will better appeal depending on risk appetite and long-term aims.”

Getting past the ‘ick’ factor

Silver’s volatility is part of the reason some investors shy away from trading it.

“Silver gets less attention partly because it is more volatile and therefore, from a purely investment and portfolio theory point of view, it is more risky,” said Mark O’Byrne, executive director at international bullion dealer GoldCore.

Gold, on the other hand, offers investors a sense of security.

Gold is the “one commodity that gives comfort” to its owners/investors that no matter what happens — in the world’s economies or currencies, rebel or terrorist activities or war between nations — the yellow metal will not lose value, said Malcolm Gissen, co-manager of the Encompass Fund ENCPX -2.25% .

“Despite its wider uses as an industrial metal, silver will never have the same cache or provide investors the same level of comfort,” he said.

Even so, silver does have a lot going for it.

It is “a better form of financial insurance and a good thing to have in the event of a currency or systemic crisis,” said O’Byrne.

That’s not such a far fetched notion.

Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management, points out that gold was confiscated under President Franklin Roosevelt in 1933 during the Great Depression, and gold, because it’s held in central bank vaults, is most likely to be used in order to back up a new monetary system.

If that happens, “silver would become the safe haven of choice investors could still freely invest in,” he said.

Silver can also score an added benefit from industrial demand.

“If the world’s economies are growing while governments run record deficits … silver will outperform gold as a hedge,” said Brian Greenberg, owner of wealth management firm Brian Greenberg & Associates in Marlton, N.J.

Silver could then see growth in investment demand from uncertainty in the financial system as well as industrial consumption from expanding economies.

“If you believe that the worst thing we will have now is massive inflation from all of the monetary printing, silver will be a fantastic buy,” said James Carrillo, account executive at precious metals investment firm Swiss America Trading Corporation. But “if you believe there will be another stock market meltdown, I would wait on silver.”

Silver is firstly an industrial metal, and secondarily a monetary metal, he said. “If industry gets hammered again, then they will flock to liquidity and gold is the only place to be.”

Lucrative potential

Even so, silver’s potential to be a lucrative investment stands strong.

Historically, silver prices have traded around 16 times less than gold, according to David Laidlaw, president of Clarus Wealth Management. Silver is currently trading 40 times less. Read about how to make sense of the gold-to-silver ratio.

If silver returns to the multiple that has existed historically, the white metal should be trading around $100 so with prices of around $40, silver’s a good buy, he said. “Gold will always be king, but silver certainly has a lot more potential for increasing in price.”

Demand for physical silver isn’t likely to slow anytime soon either.

“Very astute gold and silver bugs have realized the huge investment potential of silver eagles and have thus been eagerly buying them in recent years,” said O’Byrne. These coins and also silver bars, are held by “‘buy-and-hold’ long-term investors and savers.”

That means the metal is in “very ‘strong hands’ and this silver bullion will not return to the market unless there are much higher prices and a return to some form of financial and economic normality,” he said.

Still, silver’s destined for a wild ride.

“The higher gold goes, the more demand for silver from the smaller investor. Therefore, it will remain the most volatile of the two,” said Swiss America Trading’s Carrillo.

“I always tell people [silver] is not for the faint of heart and sometimes you need a neck brace and nerves of steel,” he said. “However, if it is long-term money, you should do great.” Read about the need for patience in gold investing.

Myra Saefong is a MarketWatch reporter based in San Francisco.

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