Why Silver Is a Better Stock Rally Bet Than Gold: SPDR Gold Trust (ETF) (GLD), iShares Silver Trust (ETF) (SLV)

With all three major stock indexes flirting with new all-time highs, investors seem to be joining the rally with abandon. Despite the very real issues of sequestration, continued easy money policy from the Federal Reserve, and a weak employment picture, there are some positives that suggest the stock market’s rally may have legs. Still, prudent investors look at the whole picture and use caution in their approach to trading, meaning that an allocation to precious metals is wise. While both gold, as represented by the SPDR Gold Trust (ETF) (NYSEARCA:GLD), and silver, as represented by the iShares Silver Trust (ETF) (NYSEARCA:SLV), have been on a multiyear rally, the industrial applications of silver make it a better play at current levels.

GLD Chart

GLD data by YCharts.

The stock market’s historic run
Over the past few weeks, the Dow Jones Industrial Average has hit a series of new historic highs, and the S&P 500 is zeroing in on its own all-time high. Highs like this tend to entice investors into stocks as fears of missing the rally intensify. This type of rotation is often a strong contrarian indicator, but the news isn’t all bad. As things stand, the S&P’s current P/E ratio is more than 5% below the index’s historical average of 14.8, based on data going back to 1968 from Thomas Reuters. In addition, with U.S. Treasuries yielding less than 2%, the average dividend yield for companies in the index was 2.19% as of last quarter; even with the run-up, stocks are offering more yield than government securities are.

In terms of the overall economy, U.S. manufacturing was unexpectedly strong in February as retail sales figures had a good showing. Factory output, which had fallen 0.3% in January, doubled expectations by increasing 0.8%. Last week’s job’s report also showed a marked improvement in the employment situation, but with the economy adding 236,000 jobs, the figure was still below the sustained 250,000 that economists believe are necessary for a recovery.

Potential pitfalls
While these figures make the stock market look appealing, it’s important to put them into the proper context. Bickering in Washington continues to intensify as the effects of sequestration are beginning to be felt. Some of the sillier debates have focused on the cancellation of White House tours and President Obama’s golf outings, while 700,000 jobs remain in harm’s way.

White House Press Secretary Jay Carney accurately described the cuts:

It’s an unfortunate result of the arbitrary, across-the-board nature of the sequester cuts. That was the — I use this term facetiously — the genius in the design of the sequester: It was written in a way to make it terrible. That was the purpose. Republicans and Democrats alike wrote it that way so that it would be so onerous that it would compel Congress to take alternative action to reduce our deficit in a more responsible way.

Of course, the compromise has yet to occur, and this is putting the economy in jeopardy. The Fed’s ongoing course of quantitative easing also means that inflation is a real concern and that much of the stock market rally can be attributed to the defense of risk assets by the central bank. Every rally contains its own special attributes, and this one is no different.

Precious metals are in an unusual position
While gold and silver have typically traded largely in tandem, the industrial aspect of silver is helping its appeal to outpace that of gold. Earlier this week, Barclays Capital lowered its price target on gold from $1,778 per ounce to $1,648 per ounce: “[D]ownside risks to the outlook have risen while upside catalysts have receded. In the U.S., despite headwinds related to the sequestration, retail sales have been strong, and, in turn, increasing confidence in the economy has weighed upon interest in gold.” A critical factor for the downgrade was the outflow of assets from ETFs like SPDR Gold Trust (ETF) (NYSEARCA:GLD), as the firm acknowledges that the “macro backdrop remains supportive for gold.”

On the other hand, in recent years the industrial demand from silver has risen to a range of 550 million to 700 million ounces per year. Industry insiders predict that this demand could rise to as much as 800 million ounces in the immediate term. Relative to available supply, this makes silver an attractive play independent of any safe haven or inflation hedge catalysts. The demand for the silver is outpacing its supply.

If the economy faces the major setbacks that are clearly lurking below the surface, thus making precious metals appealing for wealth preservation, silver still remains more attractive than gold. In a recent webcast, guru investor Jeff Gundlach explained that the “high beta” nature of silver relative to gold made it the more attractive play. Ultimately, while the stock market’s strength has some positive characteristics, silver looks like a smart play at current levels.

Getting silver exposure
The best way to play silver for most investors is probably the iShares Silver Trust (ETF) (NYSEARCA:SLV) ETF, but there are other options. Silver Wheaton Corp. (USA) (NYSE:SLW), the silver streaming company, has a market-leading 800 million ounces of reserves. The company buys the production of various miners at a fixed, predetermined price, giving it significant leverage to changes in the price of silver. Unlike miners such as First Majestic Silver Corp (NYSE:AG) and Pan American Silver Corp. (USA) (NASDAQ:PAAS), Silver Wheaton Corp. (USA) (NYSE:SLW) isn’t exposed to mounting production costs and environmental concerns. Last quarter, First Majestic Silver Corp (NYSE:AG) led the industry in cost control and still faced significant declines. Pan American Silver Corp. (USA) (NASDAQ:PAAS) came under even more pressure with higher costs. Overall, Silver Wheaton Corp. (USA) (NYSE:SLW) and the Silver Trust (ETF) (NYSEARCA:SLV) look most attractive under current conditions

The article Why Silver Is a Better Stock Rally Bet Than Gold originally appeared on Fool.com.

Fool contributor Doug Ehrman and The Motley Fool have no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!