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The big players buy silver, not gold

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by GS Early

What do Warren Buffett, Bill Gates and George Soros have in common? Big bets in silver, not gold.

It may be surprising, especially with the recent moves in the Midas metal; but silver is where the billionaires are putting their money.

On the face of it, it may seem a bit odd. Gold is the traditional store of value. And when the global economy is on the tipping point of inflation or deflation and slow growth seems to be wired in until we reach the tipping point, the rational hedge seems to be gold.

But for long-term investors, it’s important to understand that silver prices have an 84 percent correlation to gold prices over time. Nothing else comes close to running neck and neck with gold. Now, silver is certainly more volatile in the short-term, but that volatility smooths out over time.

And the one big thing silver has going for it moving forward is it has growing industrial uses that gold doesn’t have. It could very well be the key strategic metal for the 21st century.

Granted, gold will always be a store of value. But I was talking to a Chicago Federal Reserve economist recently and he noted that even though Ron Paul — and others who bemoan our straying from the gold standard — says gold is money, it isn’t (anymore). Just as a car or a home isn’t money (as we’ve seen play out in excruciating detail in the past few years). It’s a store of value but it isn’t money.

Just like you can’t pay for your dinner with a barrel of oil, you can’t pay for a tank of gas with gold nuggets — not yet at least.

This main function though, keeps gold prices far less volatile than silver prices. If you’re an older investor, gold should be a key part of your portfolio either as a hedge or as an investment; but if you’re interested in adding a dynamic kicker to your portfolio and can deal with volatility, silver should have a place in your portfolio as well. Because the future is bright indeed.

New uses

The biggest problem silver has had recently is that its value as an industrial metal has been hammered by the global economic downturn.

Silver is a key metal in building both first-and second-generation photovoltaic panels (aka solar panels). When governments were subsidizing the growth of the renewable-energy industry, silver was booming. But when economies slowed, subsidies were cut as governments slashed budgets. Silver swooned.

The solar industry has collapsed as cheaper, more predictable fuel sources have come back into vogue. Putting renewables in the traditional energy mix means putting in a lot of infrastructure and building out the century-old electrical grid to handle uploading electricity from sources like wind and solar.

To do that means a lot of spending, which means raising rates for utilities’ customers since the costs are enormous and utilities won’t eat all the cost of upgrading. Raising rates in a tough economic climate is not a wise move.

One of the fastest growing technology markets is still solid-state lighting (SSL). This sector consists of high-brightness LEDs (HB-LEDs), organic LEDs (OLEDs) and an already well-established technology; electroluminescent (EL) light. SSL is about to get a boost from the phasing out of incandescent bulbs on energy efficiency grounds that has been occurring in the U.S and around the world for five years.

OLED lighting is just at the beginning of its market evolution…. An encouraging sign for OLED lighting is that important firms are investing in its development. The three giants of the lighting industry — GE (GE), Osram and Philips (PHG) — are all in this space, as are leading OLED firms such as Novaled, and UDC.

And as the global economy recovers, more nations will turn to renewables not as an environmentally friendly energy source but to secure energy independence in whole or in part.

And along with the technologies already discussed, next-generation batteries and superconductors also require silver, as does auto manufacturing.

Silver may very well become the copper of the 21st century but still hold the precious metal position it has also traditionally held.

If you can stand the volatility and you want to stick a toe in this water, you’re best off starting with an exchange-traded fund like iShares Silver Trust (SLV) or a more leverage play on the metal like Silver Wheaton Corp. (SLW).

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