Commodities Corner: Silver’s a worthy gold rival

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By This e-mail address is being protected from spambots. You need JavaScript enabled to view it , MarketWatch

SAN FRANCISCO (MarketWatch) ?€" Silver has always been seen as less precious than gold, but it has certainly proved itself worthy of investors?€™ attention ?€" and demand for it as a hedge against the world?€™s financial woes is likely to grow.

Year to date, silver prices have gained about 26%. Gold?€™s 12% rise pales in comparison.

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The white metal is also 40 times cheaper than gold. It doubles as both a precious and industrial metal and most of the silver used in industrial applications is consumed rather than recycled.

Silver is known as a ?€œpoor man?€™s gold,?€ so as gold prices rise and begin to price out many investors, ?€œsilver becomes a good and cheaper alternative,?€ said Mark Leibovit, chief market strategist at VRTrader.com.

Silver hasn?€™t managed to garner the same attention, or prestige, as gold, but there are some tell-tale signs of growing investor interest in the metal.

World investment demand for silver climbed to 279.3 million ounces in 2010, up around 40% from 2009, according to data from metals research consultancy GFMS. That compares with a rise in industrial demand of about 20%, to 487.4 million ounces in 2010 from the year before.

And the Hong Kong Mercantile Exchange announced that it will launch U.S. dollar-denominated silver futures contracts on Friday. It cited ?€œsurging global demand for silver?€ as the reason for the launch, pointing out that silver demand rose 67% in China between 2008 and 2010, with the nation accounting for nearly 23% of the world?€™s silver consumption last year.

As many investors have learned ?€" when China, the world?€™s second largest economy, buys, the world tends to follow. Read about China?€™s impact on gold.

?€œThe rising Chinese demand of gold and silver is one of the reasons why we continue investing in these metals, even at today?€™s prices, coupled with the fact that underground reserves that can be mined at reasonable costs have become fewer and harder to find,?€ said Martin Hennecke, associate director at Tyche Group in Hong Kong.

Why gold could lose grip on $1,600

An extended selloff in stocks and a drop in the Swiss franc against the dollar are two signs that the rally in gold is likely to fade, Richard Hastings, a macro strategist at Global Hunter Securities, tells MarketWatch's Laura Mandaro.

On Monday, gold futures /quotes/zigman/5425738 GC1U +1.03% climbed to a record high above $1,600 an ounce, while silver futures /quotes/zigman/704345 SI1U +2.96% topped $42, their highest level since May. Read about Monday?€™s metals action.

?€œSilver is sort of a leveraged play on gold, so if there is a bullish move in metals, it could shoot higher than gold,?€ said Tom Lydon, president of Global Trends Investments and ETF Trends Publisher, but it can also fall harder in a gold selloff.

Silver has dropped around 20% from its late April levels near $50 an ounce even as gold continues to hit record levels.

That drop is due largely to the CME Group Inc.?€™s /quotes/zigman/107063/quotes/nls/cme CME -0.35% hikes in margin requirements for silver futures in the spring. Margins are money investors put up to be able to trade a futures contract and increases in them tend to force small investors to liquidate positions.

?€œSilver is always more volatile than gold, both up and down,?€ said Adrian Ash, head of research at BullionVault.com, an online service for gold-bullion trading and ownership. ?€œFor investors looking to play off or defend against monetary mayhem, silver or gold will better appeal depending on risk appetite and long-term aims.?€

Getting past the ?€˜ick?€™ factor

Silver?€™s volatility is part of the reason some investors shy away from trading it.

?€œSilver gets less attention partly because it is more volatile and therefore, from a purely investment and portfolio theory point of view, it is more risky,?€ said Mark O?€™Byrne, executive director at international bullion dealer GoldCore.

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