Why silver is a dance with the devil

published 6 April 2011

Last night as we slept, Asia went on a gold buying spree that sent theyellow metal to a new record of $1458.80.

That jump (and the weather) has put me in a good mood today. I've never hid my fondness for gold. And it is very nice to get a call like this right from time to time.

But maybe I've missed something here. Because as a number of Right Siders have pointed out to me recently, there is anotherprecious metal that has left gold for dust this year - silver.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

In fact silver has probably been the strongest market so far this year. And I've been very quiet about that. Today I'd like to explain why.

Silver has trounced gold this year

Take a look at the chart below, which shows gold versus silver (charting the most popular ETFs) over the last year - silver is the blue line. You'll probably see what my critics are on about!

London listed ETFs Silver vs Gold

Source: advfn.com

Year-on year gold has done well - up some 25% - we mustn't grumble. But silver's outstanding performance makes gold look somewhat pedestrian; actually, more like a hobbled pedestrian!

But silver hasn't been on my recommendation list. Other than a mention that you should pick up silver coins, I have to admit I've not served you well here. BUT I have my reasons for being circumspect about this market.

It takes love over gold and mind over matter

- Dire Straits, 1982

You may not be fond of 70s and 80s music, but popular culture can offer insights into what was going on at the time. And gold was going on at that time - big time!

I wasn't involved in the 70s gold rush myself. But when I talk to my dad, or read the books, or even mention it to the mother in law, it seems that people were into gold in a big way.

At that time, it seemed that gold ran through the veins of popular culture. It was even taken seriously in the financial world.

BUT where was silver?

Nobody I talk to remembers silver in the same way as gold. And I don't see silver featuring in the mood of popular culture. Silver gained notoriety in a kind of sullied way...

You might have heard about the Hunt brothers and how they cornered silver in the late seventies. They manipulated the market because it was small and prices were easily chased up.

That's still true today. Silver can fly. But then it can take you down in an almighty crash. The Hunt Brothers made billions inoil and lost it all on silver...

Silver is a drunken beast

Silver is a beast. Like a drunk at a party its delightful one moment, but then crazy the next. And that's why I don't like to write about it. It's why I don't offer it as a tip.

Gold on the other hand I understand. I like the fact that there are few industrial uses for it. Like a sedate grandmother at the party, gold sits in the corner... she looks on - that's gold.

Silver, the drunk, likes to act up. Maybe it's because silver has industrial uses that she feels she's got some leverage. Many investors love this aspect. They'll tell you that silver isn't just a store of value - it's a must-have for industry.

But I hate this aspect to silver. It blurs its function as a precious metal.

Silver is a tease. She says to the photographic industry - if you can't afford me, then you can't have me'. But all that does is price herself out of the market.

Industry always dumps silver if it becomes too expensive. Because there are always substitutes. A few years ago silver traded at $5 an ounce; now it's going for over $35. But the higher the price goes the weaker the demand - and the harder the fall.

That's why the fact that silver has uses isn't actually great for its value as a precious metal. The higher she goes, the automatic stabilisers of industrial demand fall away. Then she gets a little wobbly...

The dynamics of gold are totally different. That's because there's no doubt about her function. For gold, higher prices just make people love it even more. Higher gold leads to more demand. Don't ask me why - that's just the way it is with a precious metal.

But is silver still worth a gamble?

Silver can make you a lot of money - I do own a bit myself. But it is always a gamble. And you can easily get burned. This is a one-night-stand that you could end up paying the price for.

If you're still not put off, then do me a favour and at least steer clear of spread bets and anything to do with margin trading. If you have to buy silver, buy physical metal, or put your money down on an ETF - or even buy some silver mining stocks. Stick to something solid.

But I think you would be far better off sticking with gold. Here a spread bet with a 15% stop loss is quite acceptable.

But for the more traditional investor why not stick to an ETF (LSE:PHAU). If you want something a bit racier, then you can gain some leverage by going for a junior gold miner. My colleague Tom Bulford has recently put some information together on why he's buying gold - and if you're with him, he's got a great tip on a junior miner.

This article was first published in the free investment email The Right side. Sign up to TheRightSide here.

Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780

Important Information

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798 https://www.fsa.gov.uk/register/home.do

Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.