Will Silver Outshine Gold Again in 2011?

Silver bullion
Silver bullion

Everybody knows gold had a great year in 2010, rising 27% and beating most other investments. But silver actually did much better, climbing a breathtaking 83%. Can the "poor man's gold" continue to outperform its more expensive big brother?

Many analysts think so. Adrian Day, an asset manager and author of a recent book on commodities, Investing in Resources, says that for 25 years silver stockpiles were so huge that its price didn't move. But in recent months, the stockpiles have been exhausted.

"Supply-demand has been pretty tight" Day says. "I think silver could continue to go up." But he also cautions that the recent large jump, particularly since last August, means that "clearly the downside has increased."

Favored Ways of Investing

Peter Schiff, CEO of Euro Pacific Precious Metals in Westport, Conn., says he looks at the ratio between the prices of gold and silver. With gold at $1,400 an ounce and silver at $30.90, that ratio is 45:1, which is very high by historical standards.

"I think that still favors silver," Schiff says. "If the gold bull market continues, which I believe it will, people will continue to make more money in silver than in gold. If we have a big decline, then silver will go down more."

Day favors investing in silver in exchange-traded funds (ETFs), such as the iShares Silver Trust (SLV), while Schiff favors putting money in bullion. But a note of caution: Owners of physical silver (and gold) such as coins or via ETFs have to pay a collectibles tax of 28% on long-term gains, as opposed to the 15% tax on other long-term capital gains.

"As gold gets more and more expensive, there are a lot of people who cannot afford to buy an ounce of gold anymore," says Schiff. "So they take what's left of their paycheck and buy silver."

Not "Particularly Cheap"

Data from the U.S. Mint confirms this trend. It says sales of its American Eagle gold coins fell 14% last year, while silver coin sales were up almost 20%. Of course, that could be simply because investors had switched to investing in ETFs rather than owning physical coins, but the greater demand for silver is plain.

Another possible investment alternative is to buy stocks known as silver-stream shares. Both Day and Schiff say they own (SLW), and Schiff also owns Endeavour Silver (EXK). Silver Wheaton has outperformed the underlying silver price, climbing 162% in the last year. "None of the silver stocks is particularly cheap," says Day.

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Silver isn't actually mined directly anymore. Rather, 75% to 80% of its production is the byproduct of other mining activities such as copper, lead or zinc. Silver-stream companies purchase a portion of the silver output of these byproduct mining operations, usually by offering an upfront payment in return for a steady supply at a fixed price.

One of silver's attractions is that it has many industrial uses. As supplies get consumed, upward pressure is put on silver prices. Gold, on the other hand, has very little practical use apart from jewelry and some applications in electronics, so prices are more determined by speculators.

Both metals are considered a safe hedge against inflation and as a store of value. For the small investor, however, a $30 silver coin is a lot more approachable than a $1,400 gold investment.

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Originally published