Is buying silver as good as gold?

Whatever the truth in speculation about Dubai's interest in silver, many investors are beginning to ask whether the time is right to buy silver, and is it as good as gold?

From an investment perspective gold and silver has trodden a very similar upward path over the past five years, and the sudden recent correction and subsequent bounce has been well matched with a slightly sharper downturn for silver.

Indeed, the arguments for holding silver or silver-backed assets are very much the same as for the yellow metal. The immutable quality of precious metals is clear when you look at the image of a silver coin from the reign of the Roman Emperor Trajan - this was legal currency in AD112 and still has a quantifiable value today.

Supply constraints

And unlike paper money the central bankers of the world can not print more silver. The supply of this commodity expands in line with mining operations and not printing presses. It is therefore less prone to devaluation than paper money.

In fact on the supply side there is a good argument for suggesting that silver is under more pressure than gold, as more silver is used in more industrial processes than gold and the stock is actually diminishing rather than rising steadily as in the case of gold.

On the other hand, silver has never played the same quasi-monetary role in central banking that gold fulfils, and in any financial crisis it would probably be gold that gains the most in value.

Hunt factor

Silver also suffers from the 'Hunt factor' mentioned in the first paragraph. The market manipulation so blatantly executed by the Hunts in the late 1970s has left investors wary of a repeat performance by some other major investor.

Indeed, silver traders point to huge short positions in the silver market and evidence of massive market manipulation. The Gold Anti-Trust Action Committee has highlighted a similar manipulation of the gold market by central banks. But such short positions have to be unwound eventually, and could be the very mechanism of a price spike after years of artificial suppression.

One reason to hold silver as well as gold is diversification. There certainly have been times when silver prices have held up better than gold and vice-versa. Hold both precious metals and you iron out some of the fluctuations, and volatility is the major problem with this asset class for the average investor.

Arguably this is a better investment strategy than trying to 'market time' purchases. Volatility is supposed to be great for traders, and it is if they have pin-point timing. But for the average investor this is also the quickest way to lose a fortune rather than to make one.