How to Invest in Silver

Gold isn’t the only precious metal to have captured investors’ fancy lately. The silver market is white-hot. From late August through December 2, the metal’s price surged 58%, to $28.50 per ounce, racing ahead of gold’s 13% gain.

Consider silver a juiced-up version of gold. Although they tend to move in sync, silver prices have been 60% more volatile than gold prices in recent years.

That’s partly because demand for silver is more closely tied to economic activity. Unlike gold, which is used mainly in jewelry, silver has many industrial applications. Silver is used in electrical switches and fuses, in batteries, and in the making of photovoltaic cells. Demand for all these uses rises and falls with the pace of the economy.

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Another reason for the greater volatility is that the market for silver is much smaller than the market for the yellow metal. As a result, a small pickup in investor interest can make a bigger impact on silver’s price than on gold’s.

One important influence on the price of both metals is investor sentiment—gold and silver prices both rise when investors become mistrustful of “paper assets,” such as stocks, bonds and currencies.

William Rhind, head of U.S. sales and marketing of ETF Securities, says that investors are likely betting that the Federal Reserve Board’s loose-money policies will lead to a weaker dollar and higher inflation, both of which are bullish for precious metals. “By expanding the money supply, the Fed’s policy is inherently inflationary,” he says. “For investors, precious metals are the antidote to inflation.”

But silver’s recent rally has a distinctly speculative feel to it, says Chris Burba, a strategist for Standard & Poor’s. “We’ve seen a frenzied sort of buying since August,” he says. Investors have been buying silver up in heavy volume, and the metal’s price has traced rapid, steep gains over the past few months. “That is often reflective of a highly speculative market,” he says.

Silver probably won’t keep up the breakneck pace of its recent rise. “There’s a high risk of a pullback after a big rally like this,” Burba says. But he believes that the metal is still in the early stages of a multiyear bull market and that silver won’t finish its run until it revisits its record high of $49.45 an ounce, set in 1980.

You can play the rally with iShares Silver Trust (symbol SLV), an exchange-traded fund that holds the actual metal. Silver is treated as a collectible for tax purposes, so gains inside of regular accounts are taxed at a maximum rate of 28%. Year-to-date through December 2, iShares silver returned 69%, according to Morningstar.

However, given its volatility, silver should make up only a sliver of your portfolio. For more balanced exposure to precious metals, consider ETFS Physical Precious Metals Basket Shares (GLTR). The ETF, which launched in October, holds a basket of gold, silver, platinum and palladium. The fund is suitable “for investors who want access to precious metals, but who don’t want to have to decide which metals to buy or in what proportion,” says Rhind. The precise weightings among the different metals will fluctuate as their prices change. But on December 3 the fund’s weightings were: 50% in gold, 37% in silver, 8% in platinum and 5% to palladium. Like the iShares Silver Trust, the fund is backed by holdings of the actual metals.

For broader exposure to commodities in general, consider Pimco Commodity RealReturn Strategy D (PCRDX). The fund, a member of the Kiplinger 25, tracks the Dow Jones UBS Commodity index, which holds a roughly 15% weighting to precious metals, and has gained 1.6% annualized over the past five years through December 2. Year to date, the fund is up 15.7%.

Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.