Precious metals have certainly been sparkling investments over the past year, as investors seek to hedge against possible global inflation. Last week I wrote about the rush to gold, and while silver has enjoyed an even more meteoric rise, it suffered a sizeable drop recently on fears that its run is unsustainable.
Since silver is a smaller market than gold, it is much more volatile. According to figures from the Wall Street Journal, it has risen 52 percent since the beginning of the year, compared to a 5.9 percent rise for gold. Over the past year, silver's gain has been about 160 percent.
There are four major funds specializing in silver. The largest fund, iShares Silver Trust, holds about a third of the world's bullion and has tripled its assets over the past year, to $16.6 billion.
But volatility swings both ways, and investors have been pulling back from silver as it approached $50 an ounce. Early this week, silver futures fell by 10 percent as investors locked in profits because of fears that the record prices were driven by speculators and by the possible outcome of the Federal Reserve meeting this week. Gold prices also pulled back, but much more modestly.
In the wake of the Federal Open Market Committee meeting, Federal Reserve Chairman Ben Bernanke said in a news conference that the committee is seeking to "maintain low and stable inflation." Near-term inflation expectations have risen, he added, largely due to the rise in commodity prices, like gasoline, but medium-term expectations are stable.
While investors always need to even out their portfolio's ups and downs with diversification, they also need to be aware of the benefits and drawbacks of each investment. Precious metals are attractive investments when interest rates are low, as they are now. They are also a hedge against inflation. But aside from the volatility, there are fund fees and a 28 percent tax rate on capital gains in iShares and ETFs that hold commodities like silver.
Keep up with your wealth and follow me on Twitter.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.