Silver No Longer Second Best

In many households the good silver is used only on special occasion. In a portfolio, silver can be used as an inflation hedge and as a compliment to other commodity holdings in an investors' portfolio. The iShares Silver Trust ETF (AMEX:SLV) has outperformed the SPDR Gold Shares ETF (AMEX:GLD) as an investment year to date, but investors should take a moment to understand a little of the silver market history before forging ahead.

Tax Note
Investors should always consult a tax advisor before investing in ETFs that hold physical commodities. SLV and GLD both hold silver and gold bullion directly which could have different capital gains rules apply for short term and long term gains. (For related reading on the tax considerations, check out Getting Into The Gold Market.)

Silver 101
For years silver existed as a boring investment option until the Hunt brothers, two Texas oilmen, attempted to corner the market in the late 1970s. The efforts of the brothers lifted the price of silver north of $50 per oz from the depths of the low single-digits just a few years prior. Changes to trading rules and accusations of silver market manipulation sent silver prices back to earth by the early '80s. By the '90s silver was still off the radar of most investors until Warren Buffet began amassing a large stockpile in 1998. Silver would eventually return to the low single digits during the tech boom of the new millennium.

What Creates Demand for Silver?
The primary drivers for silver are jewelry, investor desire to own the physical commodity in the form of bars or coins, and for industrial uses. Industrial uses can include photography, computer parts and batteries. According to the World Silver Survey 2008, published by The Silver Institute, future price gains for silver hinge on continued fears of inflation, rising gold prices, weakness in the U.S. dollar and further investment in commodities.

Recent History
The August delivery price for silver is $17.60. Silver reached a 27-year high with an average annual price of $13.38 last year. Along with gold reaching the $1,000-per-oz plateau in March, silver also climbed past $20 per oz.

Since the beginning of the year, GLD is up nearly 10% while SLV is up nearly 17%. Investors should take into consideration that silver is a smaller market than gold so it tends to be more volatile.

Compliment to Pure Silver
The SPDR S&P Metals & Mining ETF (AMEX:XME) tends to rise and fall in the opposite direction of SLV making it an option to help mitigate the risk of a pure silver investment. XME has an approximately 74% weighting in materials companies like Freeport-McMoRan Copper & Gold (NYSE:FCX) and a 26% weighting in energy companies like Arch Coal (NYSE:ACI).

For more information on ETFs and how they can work for you, read our Exchange-Traded Funds Tutorial.