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Five reasons silver glitters more than goldWSJ, Market Watch

JANUARY 15, 2011

ROCKVILLE, Md. (MarketWatch) There are several reasons to lovegold right now. From the twin specters of a weak dollar and commodityinflation, to the recent all-time highs north of $1,430 an ounce, toreturns 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. Whats more, a look at the uses and possible supplybottlenecks of silver shows that this metal could have an upside gold may not enjoy inthe 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 theres no doubt many investors are considering thedrawback little more than a pause before the commodities skyrocket once more.

Dont be fooled by golds glitter - here are five reasons silver may be a better play foryour portfolio and several investments to capitalize on the metals run.

Silvers performanceSilver has lapped golds gains better than three times over the past year, withappreciation of about 79% compared with 24% for gold. Silver also has better long-term performance, with three times golds run in the past 20 years. Specifically, silverhas posted gains of about 637% since early 2009 compared with 255% for gold in thesame period.

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Remember, past performance is no guarantee of future results. But a look at just aboutany 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 preciousmetals are on the rise, you should bank on silver instead of gold.

Silver production bottleneckAccording to historic estimates, about a century ago there were about 12 billion ouncesof unmined silver. In 1990, commodities research firm CPM Group pegged that figureat 2.2 billion ounces. But today, that figure has fallen to less than 1 billion ounces inabove ground refined silver a number thats shrinking every day. Recycling iscommon for silver, but the dwindling supply of metal in the ground is creating a

bottleneck. Read About Six Mining Stocks To Sell Immediately On InvestorPlace.Silver demand increase

Whats more, a shift in who owns silver has contributed to a bottleneck. Stockpiles ofsilver were for decades largely part of Commodity Exchange warehouse inventories.COMEX inventories were mostly commercial holdings, with a small portion being heldfor 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-TradedFunds, there was a profound shift in the location and structure of world visible silverinventories. Rather than being a commercial stockpile, investment holdings haveovershadowed conventional-use silver by 4 to 1.

Given the long-term nature of ETF investment holdings and the current silver boom,its highly unlikely this new floor for silver prices will go anywhere. That skews thechart upward for silver. Read About Eight Dividend Stocks Likely To Boost Yields OnInvestorPlace.Silver is usefulNot to get all scientific on you, but silver is an amazing element. The substance has thehighest electrical conductivity of all metals, even copper. That means its useful inelectronics, 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 theirlong 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 andelectronic applications, it is cost-prohibitive and in many ways inferior to theconductivity silver provides.

About 700 million ounces of silver are mined each year, and Silver Insights figuresabout 75% of that metal is going to industrial and commercial use including 15% tophotography alone. Another 20% goes to jewelry and other goods like silverware. Thatleaves a mere 5% for coinage, investing and speculation. This built-in demand byconsumers and businesses provides silver a much stronger floor than gold in theopinion of many commodity investors.Read About The 10 Best Stocks For 2011 OnInvestorPlace.Silvers behavior in the last boom

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Silver and Gold gains

1-YEAR

GAIN

3-YEAR

GAIN

10-YEAR

GAIN20-YEAR GAIN

Silver 79% 105% 568% 637%

Gold 24% 64% 412% 255%

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 than10%, thanks to skyrocketing prices of commodities such as oil. Silver and gold went ona tear as a result.

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

If you believe the headline dollar amount of the peak, youll see silver has somesignificant 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, toachieve a 37-to-1 ratio with gold at current prices, silver would be priced at $37.50 orso a 22% upside.

Of course, one persons boom is anothers bubble so even if those prices are achievedyou have to know when to say when and bail out at the top. Also, theres the fact that

the Hunt brothers tried unsuccessfully to corner the silver market 30 years ago andhelped make silvers surge even more obscene.

Silver and gold in the boom years

JAN. 11, 2011 1980 HIGH 1980 AVERAGE 1979 AVERAGE

Silver $29.54 $49.45 $16.39 $21.79

Gold $1,374.00 $850.00 $612.56 $306.68

Ratio 46.5 17.2 37.4 14.1

Still, the numbers show silver isnt yet near its historic ceiling when it comes to rawprices or valuation versus gold. And by the way, these are raw numbers that arentadjusted for inflation. Based on that, silvers peak was actually around $130 an ouncein todays dollars.

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How to invest in silverYou can buy physical silver coins, of course, but as mentioned earlier, the affordabilityof silver means you need a sizeable space to store a sizeable investment.

Alternatives include physical silver ETFs that track the metal very closely, includingthe iShares Silver Trust ETF (SLV27.74, -0.26, -0.93%) and the ETFS Physical SilverShares ETF (SIVR28.30, -0.24, -0.84%) .For the aggressive silver buyer, there is a 2x leveraged ETF, the ProShares Ultra SilverETF (AGQ133.22, -2.80, -2.06%) that looks to generate twice the returns (or losses)of silver prices.Then there are the silver miners, including pure plays such as Silvercorp (SVM10.37,-0.16, -1.52%) and Pan American Silver (PAAS35.07, -1.26, -3.47%) and the Global XSilver Miners ETF (SIL23.27, -0.63, -2.64%) . There are also diversified minersinvolved in silver and other metals including gold and copper, such as Hecla MiningCo. (HL9.58, -0.17, -1.74%) and Coeur DAlene (CDE24.87, -0.04, -0.16%) .

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