Tickers in this Article: SLV, GLD, SVM, MVG, SSRI, PAAS, SLW
Gold has a special hold on the minds of some investors; so much so that sometimes other precious metals are left behind in the rush to buy the yellow metal. While silver spent much of the recession rally lagging gold, 2010 was a little different and silver dramatically outperformed gold. Just how well has silver done? Within Morningstar's industry lists, only one industry has done better than silver, and the one-year appreciation is better than 90%.
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ETF Bullion
As has been true in gold, investors have flocked to the convenience of a bullion-supported ETF. The iShares Silver Trust (NYSE:SLV) now boasts over $10 billion in assets and holds 350 million ounces of silver in trust - enough to meet the industrial demands of the world for about a year. As it tracks the price of silver (minus a management fee and some ephemeral premium/discount from day to day trading), it is no surprise to see this ETF up more than 60% for 2010, trouncing the better-than 25% performance of SPDR Gold Shares (NYSE: GLD) as of late December. (For related reading, check out Commodities: Silver.)

Market Digs the Miners
As miners are clearly leveraged to the underlying prices of the metals they mine, it is no great surprise to see that the miners did even better than the metal in 2009. Not only is this relatively typical within the industry (again, since miners are leveraged to the metal), but it may be even more so in silver as there are relatively few investable silver companies listed on U.S. exchanges. Even at the end of 2010, a phenomenally strong year for the sector, there are just eight stocks labeled as silver miners with market capitalizations in excess of $250 million.

Among the larger players, Silvercorp (NYSE:SVM), MAG Silver (NYSE:MVG) and Endeavor Silver (NYSE:EXK) led the charge. Even the worst-performing stock in the group, Silver Standard (Nasdaq:SSRI) handily beat the market for the year.

Looking at the largest pure play, Pan American Silver (Nasdaq:PAAS), this is a year where a lot of things went right. The company has been on an aggressive development program and that has led the company to more than triple its production since 2002. While Pan American's production costs run on the high side, nobody cares when spot prices are roughly triple the production cost and more than five times the cash production cost per ounce.

The Special Case of Silver Wheaton
Shares of Silver Wheaton (NYSE:SLW) soared in 2010, easily outpacing the gains in silver miners and lapping silver itself. Though almost always grouped in with silver miners, Silver Wheaton is a different kind of company - it is a royalty holding company. Much like a venture capitalist invests in a new business and gets equity in the company, Silver Wheaton gives money to silver miners to fund development in exchange for a pro rata share of the mine's output at a very low fixed price. Consequently, Silver Wheaton has tremendous leverage to higher silver prices, and 2010 has been a banner year.

It would seem that if silver can keep going up, Silver Wheaton can as well. A look at the 10-K says that the company may be getting more than 40 million ounces a year by 2013 (due to deals made in recent years) - all at very attractive prices, with no operating risk, but with upside to resource expansion.

Why Silver May Be Different
Silver has always been a strange commodity. While it used to be normal for gold to trade around a range of 16 to 20 times the price of silver, that spread blew out in the 2000s to a range of 45 to 85. Although the spread has seemingly followed a curious sine wave pattern, the average has been in the low 60s. Lately, though, silver has been testing the lower end of that range.

Does that suggest that silver's run is over? Maybe not.

Bottom Line
Unlike gold, silver has significant industrial uses; so much so, in fact, that about half of all silver is used this way. Only about 11% of gold is used in industry, and roughly one-third of it is held as an investment. While the ratio of silver held as an investment has spiked in the last year or so, it is still below gold and the combination of global economic recovery (and demand for things like batteries, cell phones and other electronics) and investment demand could push that spread ratio back to prior levels. While commodity investing is all about speculation in the demand for, and price of, goods that produce no cash flow on their own, it's at least plausible that silver could have more room to run in 2011. (For more, see Trading The Gold-Silver Ratio.)

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