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I am confused about silver and gold. Do these two metals usually go up or down together or are they completely independent? Also, what are the advantages and disadvantages of owning the commodities themselves vs. owning the mining stocks? Thanks very much, your column is very helpful. -- K.W.

Thanks for the kind words, as well as your insightful question. Now, about those precious metals...

If you compare the chart for the

streetTRACKS Gold

(GLD) - Get Report

exchange-traded fund, which directly tracks the price of gold, to the

iShares Silver Trust

(SLV) - Get Report

, which tracks silver, you will see that these two metals move in concert with each other but at different levels. Since the silver ETF started trading in May, it has generally underperformed gold by 10 to 15 percentage points.

There are some obvious reasons why gold and silver tend to move more or less in tandem. Most notably, both serve as a currency of last resort or as a store of value during periods of high inflation.

Gold has served throughout history as a leading currency and, despite what some analysts say, silver is as much a monetary metal as is gold. In the U.S., for example, gold coins were called from circulation in 1933. Standard U.S. 90% silver coins, however, were minted through 1964.

Gold and silver are also highly sought after for industrial use. Gold performs critical functions in computers, communications equipment, spacecraft, jet engines and many other products because of its malleability and conductivity. Industrial demand for silver has increased in the last half-century in areas like photography.And, of course, both metals are huge components for the jewelry industry.

But while both gold and silver share monetary and industrial uses, gold's scarcity and brilliance have always given it top billing. In turn, silver has always remained gold's less-expensive substitute.

One of the few times when silver overshadowed gold occurred in 1979 and early 1980 when Texas oil billionaire Nelson Bunker Hunt attempted to corner the silver market. The price of silver jumped to $50 an ounce in January 1980 after starting at $8.56 the previous July. Just a few months later, the price tumbled to $10.80 an ounce.

In the intervening years, silver was stuck below $5 an ounce. But due to that brief spike, many silver bugs still hold to the belief that silver has more room to run from its current levels of just over $12 an ounce.

Meanwhile, gold's all-time high was $875 in 1980, compared with its current level of $620 an ounce.

In those days, gold and silver investors were forced to buy gold coins from dealers, which required storage, or invest in mining stocks in order to get exposure to the precious metals.

That has changed, however, with the recent introduction of gold and silver exchange traded funds. The GLD, for example, enables investors to participate in the gold bullion market, with each share representing one-tenth of an ounce of gold. The SLV's shares represent about 10 ounces of silver each.

There are a few downsides to these investments, however. For tax purposes, investors of these ETFs are treated as though they own "collectibles," which means that any long-term gains will be taxed at a maximum 28% tax rate rather than the current 15% tax rate that applies to long-term capital gains on the sale of stocks and mutual funds. Another negative about gold as an asset class is that it doesn't pay a dividend, which makes it a bad idea for income-oriented investors.

Finally, like all commodity investments, precious metals are volatile. And that volatility is increased substantially if you decide to buy shares of a gold or silver miner instead of the metal itself due to the leverage involved.

For example, an analyst recently put a beta-to-silver of 1.3 times on a publicly traded silver mining company. In other words, if silver prices go up 10%, shares of that particular miner will rise 13%.

One might think the prospect of increased leverage would entice those racy hedge fund investors. Nevertheless, even hedge fund managers tend to be wary of precious-metals miners because there are still a lot of sketchy ones out there, as well as bad memories of fraudulent companies like Bre-X.

In 1997, Calgary-based miner Bre-X collapsed after the company falsely asserted that its property in Indonesia contained up to 200 million ounces of gold. Bre-X's shares crashed and investors lost an estimated $4 billion.

ETFs remove that worry, because you are just buying the metal. And there are also plenty of precious metals or commodities-based mutual funds available, which help spread out the risk.