Last week I wrote about how gold may not only be a great investment for the short term (it’s up another $20 since my article) but also has excellent prospects for the long term because of its beauty, versatility, industrial use and inflation hedge. Silver has many of these properties as well and at a much lower price, but before you get all excited about gold and silver, there are some things you need to know about these two precious metals and how they are related.

A Little History on Gold and Silver

While they may both be precious metals and move in tandem in terms of price movement, gold obviously is in far less supply than silver. A total of 165,000 tonnes or roughly 5.3 billion troy ounces of gold have been mined in human history, as of 2009. Sources vary slightly, but average total production of silver throughout history is about 46 billion troy ounces.

Silver, which has been mined for thousands of years, has seen over 50% of its production in the past 40 years. This means that silver, which trades for about $18, is about 1/68 the price of gold, which is trading for about $1,225. This ratio is extremely high; there have been times in the past when the ratio was much lower; for centuries, 16 ounces of silver got you 1 ounce of gold.

Even though more silver has been mined and the price is considerably lower, it does have a ton of exposure to industry and when economies are booming and factories are producing everything from electronic goods to clothing (silver is used in clothing in two basic forms as a bacteria inhibitor), the price of silver will tend to move higher even faster than gold. Remember gold is considered more of a “safe haven” dollar investment, so it may remain strong when the U.S. dollar is weakening.

Gold and silver have a long history with one another and tend to be highly correlated, meaning when one is moving up, the other is as well and vice versa, with gold usually being the leader. I personally don’t think the price of gold is getting back down below $1,000 any time soon, so what about that ratio between the two?

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Silver does, however, tend to be more volatile than gold, so if gold is up 10%, silver might be up 15-20%. The bottom line is that silver, like gold, can make a great investment if you feel that industrial demand will return, but inflation may be a problem. I certainly feel that silver still looks attractive at these levels and has not participated in the huge gains that gold has; it should catch up.

In my mind, that gap may need to be filled and that would mean silver moves higher by the end of the year! Just keep in mind that if the gold price corrects, the silver price may do so as well, but it may look worse, so be prepared that you may have to weather a little storm before silver moves to higher levels.

Aside from that, silver is a great long-term investment and a partial inflation hedge as well.

So How Do You Invest in Silver? Buy the Silver ETF

Just like gold and the GLD, everyday stock investors who want to take ownership in silver have an option called the iShares Silver Trust ETF (SLV:NYSE), which is also an actual trust that owns silver and then sells shares of that silver to the public (just like GLD does for gold). It trades just like a stock and is easily bought and sold in your account.

Because of silver’s lower cost, the SLV trades right around the actual price of silver, which is currently about $18. There are small fees associated with SLV, but they are minimal and shares can be bought right through your broker and held in your retirement account. SLV is one of my favorite ETFs along with GLD for buying commodities, and it’s optionable for all you option traders out there.

Consider Silver Coins

Another similarity that silver has to the yellow stuff is its history as a currency (remember silver certificates?). Silver coins can also be extremely collectable and can command values far and above their metal weight and/or face denomination. They can be stored in your home safe or other secure storage and are typically less volatile investments.

Buy Silver Miners

The companies that mine and sell silver can be another great way to participate in the rise in price of silver; two of my favorites are the two largest companies in the sector by market capitalization: Silver Wheaton Corp. (SLW:NYSE) and Pan American Silver Corp. (PAAS:NASDAQ). If you want to really step on the gas and amplify returns, buying a silver miner may be another choice. Remember that the amplification works both to the upside and to the downside.

Take a look at the SLV ETF versus SLW stock over the past year… SLW is up 110%, with the price of silver up about 28%. The trends are very similar though.

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In summary, you have three different ways that you can invest in silver and it too may offer you the diversification you need in your investment portfolio in this uncertain marketplace!

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