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Gold Holds Its Investment Value, Silver Crashes

Investors load up on 'risky' precious metals

Gold's allure has also been helped by a recent warning from the rating agency Standard & Poor's that it might eventually downgrade U.S. Treasury debt because of the continuing budget stalemate in Washington. And global jitters over the fighting in Libya and the potential default of European countries such as Greece and Portugal have helped the price, too.

Past gold booms have sometimes ended in collapse, to the dismay of investors. In January 1980, amid the turmoil of high inflation, the Islamic revolution in Iran and the Soviet invasion of Afghanistan, gold reached what was then a peak of $850 an ounce. It then dropped to the $300-to-$500 range for close to a quarter of a century. When inflation is factored in, it hasn't yet come close to that 1980 value — by some estimates, it would have to climb to $2,200 an ounce to do that.

What about silver?

While gold is traditionally used mainly for making jewelry and storing value as bullion, silver has a number of industrial uses, including, increasingly, in the manufacture of solar power cells. This can add to its appeal.

Speculative investor demand for silver has increased markedly over the past five years, according to RBC Capital Markets. In 2008, investors represented 5 percent of the total market for silver. In 2010, that had grown to 17 percent, RBC found.

The kinds of speculative bubbles from which silver's price came crashing down in recent days are becoming more commonplace as a new generation of hedge funds push selected kinds of assets toward the stratosphere with their purchases, then cash out when mom-and-pop retail investors get interested.

Bruce Zimmerman, chief executive officer of the University of Texas Investment Management Company, told CNBC television that he has been buying gold as a hedge against loss of value of currencies. "The concern is that we have excess monetary and fiscal stimulus," he said.

Unlike currencies, gold comes in a limited supply, and you can't turn on the printing presses and make more of it. That's what makes it so valuable.

Michael Zielenziger writes on business and the economy. He lives in the San Francisco Bay area.


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