Why Silver Is a Better Buy than Gold

NEW YORK (TheStreet) -- In moves rarely seen these days, exchange-traded funds that track valuations in precious metals are surging into the later parts of this week.

These moves came after comments from Federal Reserve Chairman Ben Bernanke, which showed the central bank remains committed to holding interest rates near their lows -- even if we do see modest improvements in the labor market.

The effect on commodities prices was pronounced, with gold seeing single-session gains of more than 3%, silver rising by 4.6% and oil moving to 15-month highs after the latest Fed meeting minutes were released. But does this signal a true reversal in the badly beaten precious metals space? Should investors start looking to build new long positions?

Earlier in the year, metals investors holding positions in products such as the iShares Silver Trust ( SLV), the iPath Dow Jones UBS Copper Total Return Sub-Index ( JJC) and the SPDR Gold Shares Fund ( GLD) had high hopes for major bull rallies.

In an economic environment supported by central bank stimulus, many metals forecasts suggested gold and silver would be used as an inflation hedge, an alternative to a weakening U.S. dollar, and protective safe haven in times of economic turmoil.

Even alternative scenarios were bullish as a strong economic rebound would stoke both luxury and industrial demand (silver, in particular, is a key component in everything from automobiles, to electronics, to solar panels).

But the market reality was quite the opposite, and the commonly-traded GLD and SLV ETFs have already seen massive year-to-date losses of 22.6% and 33.5%, respectively. These moves were perhaps most surprising in silver, given its importance as an industrial metal. But with weakening manufacturing data in emerging markets and not much evidence of progress in the global recovery, there have been few reasons to buy -- and silver has had its worst performance in nearly 30 years.

Potential Reversal?

So, what does all this suggest for the short-term rallies seen this week? Are we seeing the beginning of the end for the bearish moves in silver and other precious metals?

Given the strength of the longer-term trends, there is not much to suggest that this week's activity marks a true bottom. From a fundamental perspective, demand remains weak while supply moves in the opposite direction. But when we compare silver prices to its main counterparts, there are some reasons to expect moves higher in silver on a relative basis.

Not only is silver supported by the largest number of bullish scenarios, it is also the most oversold relative to its peers. Like copper, silver has a broad array of industrial uses. Like gold, it has the tendency to perform well as a safe haven.

But since gold has no true end-market (as it is bought primarily by investors or used in jewelry), the broader prospects favor silver on both a technical and fundamental basis -- whether the economy improves or stalls through the remainder of 2013.

Given the force of this year's downtrend, the latest rally does little to repair the damage investors have faced when dealing with the precious metals markets. But for those approaching the market from a contrarian perspective, it does make sense to start looking at silver investments as a growing opportunity -- especially when compared to its peers.

This is better done through the use of ETFs rather than futures contracts in the metal. A good choice is the iShares Silver Trust, which is starting to look better and better from a risk-to-reward standpoint.

Another option is Silver Wheaton ( SLW), which has key advantages over many of the silver miners. Silver Wheaton has comparatively strong margins and is able to lock in products from miners at low rates. This generally insulates the company from many of the industry's central risks and offers some attractive opportunities for those looking to buy into this year's weakness in the metals space.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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