Circumstances Add Shine to Silver

In 1998, the world produced 824 million ounces of silver; in 2007, production only grew to 894 million ounces, which is not much of a jump considering that silver has reached $20.69 an ounce this year, up from its nadir of $4.20 in 2001.

Silver has several short- and long-term aspects that make it an attractive investment. Emerging markets, central banks printing money, an overheated U.S. dollar and higher production costs all make this metal a good place to make a buck in a down market. The iShares Silver Trust (SLV - commentary - Cramer's Take) is an exchange-traded fund that holds silver in a vault and makes it easy for investors to trade the commodity.

Silver has many uses beyond jewelry and hedging -- it is also an excellent conductor of electricity. In 2007, industrial demand accounted for 54% of global silver fabrication, according to the Silver Institute. Jewelry, silverware and coins accounted for 31%.

Short term, demand for jewelry and silverware could drop, including consumer goods sold at places such as Tiffany's (TIF - commentary - Cramer's Take) and Target (TGT - commentary - Cramer's Take). As consumer credit dries up, the demand for electronics is waning -- just look at Circuit City.

Long term, however, demand is strong. As more people move out of rural areas in Asia and Africa, residents will demand more goods as their incomes grow, and silver is used in many of these products.

Metals and commodities do well when central banks print money and drive down the value of many goods. Goods such as silver, gold or a barrel or oil, however, hold the same value across the globe.

If your home country prints more money than another country, these items become more expensive, because people in foreign countries can buy them as their currency strengthens. Do you think that the U.S. will have to keep printing money to bail out financial institutions? Probably.

According to the Federal Reserve's Web site, we now have $7.8 trillion in M2 -- a measurement of all cash, banks deposits, coins and other monies in our economy -- compared with $4.3 trillion in October 1998. That's a 6.14% rate of growth in our supply of money -- many investors wish they had a 6.14% rate of return on their investments over the past 10 years!

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At the time of publication, Osborne had no positions in the stocks mentioned.

Holmes R. Osborne III is a private money manager, founder of investment newsletter StockRoyalty.com and frequent author of financial columns. He has a degree in finance from the Martin J. Whitman School of Management at Syracuse University and is a CFA charter holder. Osborne is a member of the Pacific Council on International Relations, Malibu Rotary, Business Forum International and was formerly on the board of the L.A. National Association of Business Economists. He spoke this year at the fifth annual Value Investor Conference.