-- Posted 30 May, 2009 | | Discuss This Article - Comments:

Silver had its best monthly gain in 22 years in May, and ended at $15.70 an ounce, still considerably shy of the $20 the metal reached when gold passed $1,000 in March 2008.

That there is still some immediate upside in the silver price is thus evident with gold finishing the week at $980, tantalizingly close to its former March 2008 high. Indeed, while performing well over the past couple of weeks silver has actually lagged behind the recovery in gold, hence it is still short of its recent high.

Volatility beware

Welcome to the notorious volatility of silver whose leverage to the price of gold works both to the downside as well as the upside. Caveat emptor, or volatility beware, silver still looks the best buy for maximum gain in this precious metals bull market.

It has been observed in previous bull markets for gold that the ratio of the gold to silver price tends to reduce, partly because silver stocks are less than one hundredth the size of gold, so a sudden surge in demand produces a big impact on the price.

An ounce of gold is currently worth 63 of silver, and in the days when gold was used as a currency this ratio stood at 15. So there is plenty of room for silver to continue to out perform gold as precious metal prices advance.

Currently also working in silver’s favor is the economic recovery argument which suggests increased demand for silver for industrial use such as electronic goods. But this might prove a negative factor as euphoria over green shoots gives way to a more realistic assessment.

Money printing

On the other hand, in a world where central banks are printing money and the US dollar in particular is suffering devaluation then gold and silver – which are priced in dollars – will benefit automatically as the relatively fixed supply of metal is re-priced to reflect the increasing number of dollars in circulation.

Should a bold investor therefore switch entirely into silver and out of gold? It depends how much volatility you can handle, and diversification is preferable if you want to be able to sleep at night. Silver was a little over $8 an ounce at the end of last year, though admittedly many investments hit low points then, but gold held up much better.