Is Silver Really a Better Investment than Gold?

 |  Includes: DGL, GLD, IAU, SLV
by: Terence Chan

James Altucher has a good article in the NY Post on why silver is a better investment than gold. He argues that silver has better demand fundamentals due to a recovery in industrial demand and inventory restocking. Meanwhile, other than an alternative to fiat currency, gold has no demand fundamentals supporting its current run as jewelry sales have been weak.

Altucher writes:

Here’s what I like about silver as a long-term investment instead of gold: it’s got the one-two punch. Not only is it a precious metal like its big brother, but the bulk of demand for silver actually comes from its industrial uses: batteries, dentistry and as an electricity conductor.

Silver even has anti-bacterial qualities — which is why surgical equipment is often made with silver (and why 2000 years ago whenever a ship went on a long voyage they’d store water and food in silver vessels). It is the health features of silver that probably led to the various myths surrounding the metal (for instance, it takes a silver bullet to kill a vampire).

For each of the past 15 years, demand for silver has outpaced the amount of silver mined that year. To meet the demand, the rest of the supply comes from melting down jewelry or from governments selling on the open market. The US used to be the biggest seller of silver, and that’s how the world would meet its annual hunger for the precious metal. But guess what? The US government ran out in 2004. Oops!

Now they have to buy it if they want to put that tiny silver around the quarter. Eventually, high demand and low supply means one thing: higher prices.

He further argues that silver has a one-two punch, being both an industrial play and an inflation hedge (being a precious metal), while gold is but an inflation hedge that is overexposed through mainstream media:

Silver’s also an inflation hedge because it’s a precious metal and because of its industrial uses. It will go up in this economy as the dollar continues to weaken and the economy comes back in 2010. Inventories, cut to all-time lows by businesses in every sector that were anticipating the end of the world that never arrived, will need to be restocked

His final recommendation?

Historically, the ratio of gold prices divided by silver prices is about 40, but at the moment it’s at 60, meaning either gold must come down or silver must go up to get back to its historical levels.

So hold onto your silverware and sell your gold if you need to raise some cash. Or do what the ancients did and give a silver necklace to your child to ward off evil spirits — that’s the twin evil spirits of inflation and poverty.

My technical take (chart below): nothing contradicting Altucher's sentiments on silver, but nothing really bullish either. Silver is trapped within a rising channel trading range, and until it breaks out from it, I'd recommend a range trading strategy. (Click chart to enlarge)

Disclosure: No long position in SLV