Buying Silver vs. Gold as an Investment – What’s Better?

When I started trading commodities in the fall of 1990, the price of gold was $400 an ounce. From September of 1990 to September of 2005, the price of gold ranged from around $280 to $450 an ounce: a difference of $170 over 15 years. Over the course of any given year, a $40 to $50 move in the price would be considered a big – in a single year.
Nowadays, that’s an afternoon. Since September of 2005, the price of gold has been on a historic run – from $450 per ounce to a high of $1,875 per ounce in 2011. Now gold trades at around $1,650. The average investor probably didn’t pay much attention to the first part of the rally in gold, but once it convincingly crossed $1,000 in 2009, most market watchers keep an eye on gold along with the Dow, the S&P 500, and the price of crude oil.
What was once only watched by central banks, insurance companies, and gold miners suddenly has become as mainstream as IBM and Microsoft. In fact, I would say that gold is even bigger. Indeed, it’s arguable that gold has become the world’s third most important currency. As the financial crisis of 2007-2009 unfolded, many people flocked to gold as a “safe haven” investment. The average small retail investor can easily invest in gold through exchange traded funds, or ETFs.
But what about other precious metals? What about silver? Silver has had an impressive run up in price as well, and may even have more upside than gold over the coming months and years.

The Market for Silver and Gold

Silver had an incredible run, just like gold, from 2005 to 2011. It went from having a value of approximately $7 per troy ounce to $35 per ounce over that time period. In percentage terms, that’s even bigger than the gold move.

Industrial, Commercial, and Consumer Demand

Silver has many traditional industrial uses. Historically, silver was a key component in film used in most cameras. The rise of digital cameras, however, has practically made film obsolete, but the development of cell phones and other technology has helped fill the void.

Silver is used in virtually every electrical appliance in the world due to its low resistivity. Photovoltaics, the method by which solar radiation is converted to electrical power, requires silver for both semiconductors and solar panels. There is growing use of silver in the medical profession, as silver has antibacterial properties. Other new silver applications include use in wood preservatives, water purification, and food hygiene. Everyday items, such as refrigerators, mobile phones, computers, washing machines, vacuum cleaners, keyboards, counter tops, and even clothing contain varying amounts of silver.
Gold, on the other hand, has limited industrial uses. Jewelry, particularly in developing countries like India, accounts for over two-thirds of annual gold demand. Dental and medical applications account for about 12% of demand. But one has to wonder: If the price of gold keeps going up, at what point will demand decline because it’s too expensive? For example, will consumers in developing countries continue to buy jewelry if gold goes to $2,500 or $3,000 an ounce?
Even luxury items have a point at which people stop purchasing them. Products like consumer electronics and solar technology, however, seem to still have tremendous upside. This is because they use silver which is still quite reasonably priced, relatively speaking. Though the rise in the cost of silver is equal to or greater than gold in percentage terms, it’s still just over $30 an ounce. Therefore, it seems unlikely that cost will be a limiting factor when it comes to the industrial uses for silver. The same, however, can not be said for gold.

Central Banks, Fear, and Financial Stress

As stated previously, gold is viewed as a store of value, and rightly so. History tells us that having too many investments denominated in one currency is a recipe for disaster. As gold has risen in value over the last decade, the value of the U.S. dollar has declined. This is due to two main factors:

1. The U.S. government has had to pump so much money into our economy that the value of the dollar is diminished.
2. Countries, such as China, that hold trillions of dollars in U.S. bonds, are concerned that they have too much money invested in dollar denominated assets. So what do they do? They buy gold, essentially swapping some of their dollar risk for gold risk.

Silver and other precious metals, such as platinum and palladium, have also benefited from the stress caused by the recent financial crisis. While gold is still the preferred vehicle as a hedge against fear, silver has a growing appeal as a safe haven. As investing in silver becomes easier, more people may try to take advantage of that play to protect their portfolio.

Source :  http://www.moneycrashers.com