Silver: the "poor man's gold" getting richer

Silver: the "poor man's gold" getting richer

No wonder many investors are looking at the shiny white metal with new eyes.

Silver generally grows in a pattern similar to gold, because their prices are driven by many of the same factors. The U.S. and global economic recovery in the wake of the 2008 sub-prime mortgage crisis has been sluggish, and many markets remain volatile. The U.S. Federal Reserve's quantitative easing programs have loaded over a trillion dollars in U.S. government debt onto the U.S. dollar, raising fears of currency devaluation and runaway inflation. Historically low interest rates have stripped the profit out of many previously lucrative forms of investment. And over in Europe, two nations have recently required a bailout due to unmanageable debt and several more economies are in trouble, raising the specter of debt contagion across the eurozone. All of these factors benefit gold and silver in roughly equal measure, as softening currencies and other paper assets motivate investors to buy hard assets such as precious metals, both as a shelter from bearish currency markets and as a lucrative investments in their own right.

Spooked by the prospect of their hard-earned cash being gutted, many less wealthy investors entering the precious metals market are turning to silverwhich, like gold, can be bought and traded in bullion and coin form, as well as traded as shares in exchange-traded funds (ETFs)not only because it's substantially cheaper to buy than gold, but because the returns these days are substantially better. Given silver's fantastic 2010 track recordits percentage growth has been almost triple that of gold this yearsmart silver investors are making out like bandits for a fraction of gold's per-ounce outlay.

The price of silver, however, is more influenced by industrial demand than the price of goldsilver is used in solar panels, electrical wiring and water-purification systems, for examplemaking it a substantially more volatile investment metal than gold. Increasing demand from silver-consuming industries is a big part of the reason why silver gained so dramatically this yearif demand dramatically falls due to a downturn in the global manufacturing sector, the price of silver can plummet while gold remains relatively stable.

And so the investor is faced with the classic dilemma of risk and return: smaller gains in exchange for less risk, or potentially huge gains in exchange for substantially higher risk?

At Friday's close in Toronto, the March silver contract traded at US$29.035 per troy ounce, while the February gold contract traded at $1,370.00 an ounce.

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