Silver: Room for Growth

Maloney, author of Rich Dad's Guide to Investing in Gold and Silver, says silver prices can hit quadruple digits and will outperform gold over the long term. During the last decade, gold prices soared to a high of $1,227 an ounce while silver moved from $4.57 to a high of $21, with prices now trading in the $16 range.

Silver is a thinner market, and prices are subject to more volatile swings. Silver also has different leverage than gold. Not only can it trade as a safe haven asset, but it also has exposure to growth and recovery sectors, like industrials. Maloney said that in times of both inflation and deflation, gold prices will skyrocket as the precious metal will have to cover the amount of base currency and outstanding revolving credit. Silver's story is a little different but more profitable.

Which metal do you want to own, silver or gold?

Maloney: I think in inflation silver will perform with gold. In ... deflation you will see silver lag. People are trained [to] think gold in a currency crisis, gold as a safe haven. But there will come a day where gold will get too expensive for the common man [and] at that point just like in 1979, [silver's price will] explode. I believe in either scenario [silver will] blow the doors off of gold on a percentage basis. ... For the first 2,000 years that gold and silver were money, the average exchange rate between the two was that silver's value was about 1/12th of gold's value.

According to Maloney's ratio, at today's gold price of $1,100 an ounce, silver should be $96. But if gold hits $15,000, silver could rise to $1,250. Mike thinks silver can beat that number.

Maloney: I like the physical metal first. History shows that the physical metals outperform the stocks on an average. If you take the Barron's Gold Mining Index and divide it by the price of gold you'll see from 1970 to today, gold outperformed [the index] by about 4%. In other words, the mining stocks actually underperform on an average, but if you're good at picking stocks, of course you could outperform gold significantly.

Maloney: There are these rare moments in history that go by in a blink of an eye, so as far as historic terms go, where the safest asset class [is] is the place where people [go] to protect their purchasing power. The safest asset class also simultaneously becomes the asset class that has the single greatest potential gains in absolute purchasing power. And we're in one of those times right now when gold and silver are being revalued by the public. [Just like in 1980 and 1934] all of the circulating medium would be redeemable in gold.

For an everyday investor, why wouldn't you recommend a gold or silver ETF?

Maloney: The ETFs are a derivative, first of all. You can't put your hands on that gold and silver at any given moment. ... Second, they are controlled by the spot price, which is created from the futures market ... futures again are a derivative. That means for every futures contract there is a long and a short.

Maloney: I buy coins and bars ... I stay away from all collector coins. But going back to the ETFs ... during the market crash of 2008, gold and silver followed the markets for a little while, [and] that's basically due to the ETFs and people having futures on their trading platforms. When they had to get liquid because of margin calls during that crash, they dumped everything including their gold, which was just paper gold. So gold fell in price along with the markets, but about half way down it diverged. Gold bottomed in November when the markets didn't bottom until March when gold peaked. So gold turned around and did what it was supposed to do. It was the safe haven, and it rose when the markets were crashing, and it peaked exactly when the markets bottomed.

Maloney: Also, the real physical free market gold and silver diverged from the spot price about halfway down. And it turned around because there were tremendous shortages that happened last year ... there are some items that [were] very hard to get. [For example], the price of silver eagles on eBay(EBAY Quote) was $35 each when silver's price was $9 on [the] futures market. I'm expecting that to happen in a currency crisis. You could see the spot price go south while the real price ... goes north. If you're sitting on the ETFs like GLD(GLD Quote) and SLV(SLV Quote), you could be watching your investment go down while anybody holding actual physical might be making enormous gains.