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If Precious Metals Rally, Then Pick Silver

Simon Constable

Precious metals could be just the right thing to put a shine in your portfolio. But which metal should you pick -- gold, or its scrappy sidekick, silver?

There's a case to be made for silver over gold, at least for people looking to hold the commodity for at least a year or two.

Why precious metals? Some people remain skeptical of the economy, and precious metals are one of the best safe havens to protect investors from a market downturn.

"The stock market is at all-time highs, and there is a feeling that it won't last," says Charles Thorngren, CEO of Noble Gold Investments, based in Pasadena, California. Even though the unemployment rate is historically low, "it doesn't feel like people are fully employed and wages don't reflect a strong economy," he says.

[See: 10 Tips for Keeping a Cool Head in a Market Meltdown.]

The Federal Reserve is starting to reverse its money printing program, also known as quantitative easing, and that could help gold, says Axel Merk, chief investment officer of Merk Investments in San Francisco.

He says the effect of the money printing was to depress the so-called risk premia. That is the amount extra that borrowers have to pay over what the government pays to borrow. As the Fed unwinds quantitative easing, then Merk sees risk premia widening, which will hurt corporate bond prices as well as the stock market.

But it won't hurt precious metals. In fact, prices should rally, he says.

When geopolitical tensions rise, such as those between North Korea and the U.S., then precious metals get a boost.

"What has been propping up gold is geopolitics and (President Donald) Trump's tweets," says Konstantinos Venetis, senior economist at TS Lombard in London.

If things flare up with North Korea, Iran or somewhere else, then expect prices to jump again.

[See: Oil ETFs: 8 Ways to Invest in Black Gold.]

Why silver? Silver prices tend to be more volatile than those of gold prices. In 2016 gold prices rose 8.1 percent, but silver prices rose 16 percent, according to data from the London Bullion Market Association.

It works in reverse as well -- when the price of gold falls, silver prices tend to fall further.

The reason for this is because changes in the supply of silver are less reactive to changes in the price than is the supply of gold. When gold prices fall dramatically, some gold miners will find it less profitable to continue mining and so will stop digging. That lower supply tends to put the brakes on a price fall.

That doesn't happen as much with silver because the metal is often a byproduct of mining other metals. Therefore whether the price goes up or down, the supply of the metal doesn't necessarily change. As the demand for the metal increases, the supply doesn't move and the price increases.

It is worth noting that the extra volatility of silver versus gold is something of a two-edged thing.

"Volatility can be your friend when prices are going up," says George Milling-Stanley, head of gold strategy at State Street Global Advisors. "Volatility isn't your friend when prices are falling."

That means you need to get the direction of precious metals prices correct or you could lose money quickly.

It is because of that extra volatility that Milling-Stanley says that silver is a tactical asset rather than a strategic one. A strategic asset, such as gold, is something that you might hold in a portfolio for decades, just like many investors hold a large helping of stocks for 30 or more years.

A tactical asset is one purchased with a view to holding it for a far shorter period, say just a few years.

How to invest. The largest and most liquid fund, is the iShares Silver Trust (ticker: SLV) which holds bars of solid silver. It has annual expenses of 0.5 percent or $50 per $10,000 invested.

Other alternatives include the Physical Silver Shares ETF ( SIVR) which, like the iShares product, holds bars of solid bullion and has expenses of 0.3 percent. For small investors, this fund may make more sense than the iShares one because of the lower expenses. But it isn't necessarily best for people who want to buy or sell in large quantities. That's because the averaging trading volume of the SIVR product at 125,000 is a tiny fraction of the 8 million in the iShares fund, according to recent data from Morningstar.

[See: 10 Commodities Investments to Rev Up Your Portfolio.]

The PowerShares DB Silver Fund ( DBS) is "designed for investors who want a cost-effective and convenient way to invest in commodity futures," according to the fund website. It has expenses of 0.75 percent.

Those who prefer gold should consider the SPDR Gold Shares ETF ( GLD), which holds bars of solid bullion. It has annual expenses of 0.4 percent.

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