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Silver Giving Gold a Run for Its Money

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The white metal is up 5% this week and 23% this year as investors look for safe havens.

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It's gold that's dominated the headlines with a record run, but its cheaper alternative has also moved sharply higher.

Silver -- sometimes referred to as "poor man's gold" as an investment vehicle -- is up 5% this week and 23% this year. That's even better than gold, which has gained 16% so far in 2010.

The iShares Silver Trust (SLV) is up 23% year to date. The stocks of mining-related companies have also benefited: Pan American Silver (PAAS) is up 20% for the year; Silver Wheaton (SLW) is up 66%.

Silver retains dual attractions: an investment vehicle with safe-haven allure as well as a play on economic recovery given its many industrial applications.

First, as for investor demand, your friends and neighbors are buying silver for the same reason they're purchasing gold, says Bill Fleckenstein of Seattle-based Fleckenstein Capital: They're looking for ways to protect their wealth.

"There is a bid for stores of value as people try and protect themselves against the depreciating worthless confetti that we call money," Fleckenstein says. "None of these currencies are worth anything. We have printed money like drunken sailors and that leads to inflation."

As of September 10, the silver holdings of exchange-traded funds have risen by 33.6 million ounces so far this year. That's compared to a jump of 150 million ounces last year, according to CPM Group, a New York-based commodities market research firm.

Jeffrey Christian, founder and managing director of CPM, doesn't see this year's more modest rise as indicating any kind of waning investor demand for the white metal, however. In fact, he argues demand will remain strong for silver as an investment vehicle.

"2009 was an exemplary year," Christian says. "We had a financial market meltdown and there was just enormous investor interest. So it's not fair to compare 2009 to 2010 figures because 2009 was off the charts."

As for industrial demand, The Silver Institute, a nonprofit industry group, notes that the metal is used in everything from computer keyboards and automobile dashboards to the control panels of washing machines and the circuit breaker boxes in our homes.

Industrial demand for silver took a hit during the economic downturn. But Bart Melek, global commodity strategist at BMO Capital Markets, forecasts the amount of silver used for fabrication increasing 7.6% from 2009, although that will still leave what he says is a modest surplus of silver supplies on the market.

Specifically, for 2010, Melek estimates there will be a surplus of 90 million ounces of silver.

"Now that could very likely go to the downside," Melek says, adding, "It's an industrial commodity and investors are content with the view that we won't slip back into a double-dip recession. So demand should remain robust especially in the application area."

Melek expects silver to average $21 for 2011.

No positions in stocks mentioned.
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