The basic arguments for investing in gold apply to silver as well. Precious metals act as a hedge against all manner of grim things, including inflation (or deflation), currency frailty (chiefly the dollar), fiscal chaos (see Greece) and various geopolitical concerns, such as terrorism or widespread civil unrest.
Fervent investors in precious metals tend to have a dark view of the world. Scratch a gold bug, and you might find a canned-goods enthusiast or someone who thinks the world's currencies will one day collapse.
Sure, gold and silver have been great investments over the past couple of years. But silver seems to have departed the basic arguments and taken on a more manic stripe, while gold has retained a degree of restraint. It is that divergence that argues for looking at these two metals differently.
Take the last two weeks. Silver is down nearly 30% this month in volatile trading -- such a move in the Dow Jones Industrial Average would equate to an eye-watering drop of more than 3,700 points. Tony Crescenzi at Pacific Investment Management Co. called silver's parabolic rise and subsequent skid a "tulip-mania style move."
Silver backers counter that even with its recent drop, the lesser precious metal has still retained a nearly 80% gain over the past year. Of course, it was up nearly 150% three weeks ago. Over the past year, gold is up 23% and the S&P 500 is up 15%.
Even before silver's recent dive, things had gotten pretty crazy in the silver markets. On April 25, the iShares Silver Trust ETF traded nearly as much dollar volume as the SPDR S&P 500 ETF. And the CME Group, which oversees silver trading at its Nymex unit, tightened silver margin requirements four times in the last few weeks as the speculative fervor got woollier and woollier.
During silver's first week from Hades, which ended May 6, gold fell a more modest 4.2%. Indeed, during the commodities rout last week, gold held up better than almost anything else, something overlooked by critics of precious metals who like to lump gold and silver together.
Clearly, gold and silver are trading in a different manner. Silver is more tulip, gold is more, well, gold. Silver's lower price-point has made it attractive to smaller investors who find gold a bit out-of-reach, helping to fuel the metal's manic trading. Silver is also a smaller market, about one-quarter the size of gold's, which adds to its volatile nature. And, lastly, central banks prefer to hold gold, rather than silver, in their reserves, a reason that gold trades with more stability than silver.
Despite these market differences, silver backers are eager to keep the two metals tied closely together, hoping to bask in gold's aura.
"Silver will be a currency just like gold. It's logical to expect silver prices to go much higher," said Eric Sprott, chief executive officer of Sprott Asset Management LP, which oversees a $1 billion silver fund.
Along with the mania -- silver bounced 5% on Monday, while gold has continued a more sober trading pattern -- there are two other reasons to think silver and gold will have different futures.
One is supply. While gold supply is well understood, silver bulls and bears argue about just how much silver is out there. Some analysts have made the case that silver in batteries and photographic film are "recycled" back into the market, reducing the scarcity value of silver. Silver bulls, of course, think that's a bunch of poppycock.
More importantly, the gold-silver ratio has gotten a bit out of whack. During most of the past 10 years, the gold-silver ration hovered around 60, meaning that gold was 60 times more expensive than silver. Silver's incredible surge over the past year has pushed the ratio down to 43. At its peak, way back on April 29, the ratio narrowed to 31, a level not seen in three decades.
Silver bulls will argue that the ratio should reflect ancient rites, such as the 15.5 level authorized by France in 1803 or the 15 level outlined in the U.S. Coinage Act of 1792. It's more likely that the ratio will revert to modern-era norms rather than race back to the Napoleonic era. And that means that gold, more than silver, looks like the solid store of value today.