The last ten years were considered the lost decade in investing. The S&P 500 Index dropped 1% annually. However, investments in precious metals and oil provided an investor with double digit returns.

Looking forward to the next decade, the bullish case for precious metals is that it provides the long term investor's portfolio with a valuable hedge. A hedge against war, terrorism, natural disasters, health pandemics and systemic financial risks.

Precious metals are also a hedge against the prospect of future inflation. As inflation increases in the years ahead driven by massive United States federal budget deficits, precious medals will increase in value.  From 1973 to 1984, a high inflation period, precious metals were the top-performing asset class.  

But the bullish case for precious metals goes beyond the prospect of future inflation. Precious metals are also a hedge against a decline in the U.S. dollar, and the economic issues associated with continued deflation.

In the years ahead, precious metals will have increasing demand from emerging and developing markets like China, and India. Increased demand will also come from recovering economies in the west while the supply of these commodities will become more scarce. The end result will be an increase in price and long term portfolio gains for astute investors.

So, how is the small investor to profit from this trend in Precious Metals? What works in a long term portfolio? These are the questions that must be answered to profit in the world to come.

Of course, we could buy a gold mutual fund or a small gold mining stock and just put it away.  The problem is that the underlying metal is leveraged to the high cost of its mining. The result is that most mining stocks give the investor a high degree of financial risk. It is entirely possible to correctly guess the increasing price of the base metal and invest in vain in the wrong mining stocks.

Certainly, every consideration should be given to an investment in Freeport Mcmoran (FCX), Newmont Mining (Nem) or Barrick Gold (ABX) or even the more speculative Novagold Resources (NG). A commodities mutual fund like the Fidelity Global Commodities fund would make a wise choice for holding metals in a mutual fund selection.

However, we believe that the least amount of risk with the best chance of long term capital appreciation is holding the metal itself in an exchange traded fund (ETF). Another consideration is what is the best metal to own for price appreciation over the long term.

Investors buy gold primarily as a hedge against inflation, because its use in industrial applications are minimal. However, there is more than just an inflation hedge to silver. The metal is also considered a “safe haven” investment that appreciates when inflation worries spike but silver is also a raw material used in the manufacture of countless everyday items, including electronics, batteries, and film.

In fact, silver has an underlying demand that is rapidly increasing with new technology and innovation.  Demand will increase in the automotive industry for silver-zinc batteries, which are far more efficient than traditional lithium-ion power. Silver is also used in many other products of tomorrow's technology, including plasma TVs, solar panels, and water purification applications.

So, silver is a metal that provides all the benefits of gold and can appreciate no matter what the economic condition. Providing the same hedge benefits as gold and positioned for increasing future industrial demand bodes well for the long term price of silver.

As a result, eWorldvu.com is buying 500 shares of ETF's Silver Trust (SIVR) at the opening of the stock market on 2/11/2010 in the Model Growth Portfolio. Our intention is to add more shares on price weakness in the future.

(eWorldvu.com members may hold the ETF's Silver Trust Exchange Traded Fund. Please do your own due diligence prior to investing. This Exchange Traded Fund holds silver bars and has a low expense ratio of 30 basis points.)

http://www.eworldvu.com

Update on Thursday, February 11, 2010 at 10:07AM by Jim Smith

Bought 500 at 15.28 at the open of SIVR . S/P at 1063