There’s a big debate in the commodities world: Which is a better investment, gold or silver? Gold usually gets much of the fanfare and stronger returns. But this was not the case last year, as silver surged 81%. Gold was only able to muster a 28% increase.

Even though silver is still 40% off its all-time high from the early 1980s, it is still not an easy decision to jump in. But would it be possible to buy silver at a discount? The answer is “yes.” At the core of any silver company is its reserves.

With silver’s price surge, these reserves are now sporting high valuations. So a clever way of analyzing this is to compare this value to a company’s market capitalization. [I recently did this with gold miners. You can read that piece here.]

Here’s a look:

By purchasing stock in Silver Standard for instance, you are essentially buying its reserves for a measly $1.58 per ounce. Even for those with higher prices — like Silver Wheaton and Silvercorp Metals — the discounts are still attractive.

#-ad_banner-# Of course, this does not mean it’s necessarily a good idea to buy these stocks. It is still important that silver remain strong. The good news is that there are a variety of key forces driving the bull move. For example, about 40% of demand comes from industrial purposes. Some of the applications include mobile phones, chemicals, batteries, LCD/plasma screens and medical instruments. Because of the global recession, demand fell in 2009, but it looks like growth is coming back.

In the meantime, there has been a spike in investment demand, which went from 5% of demand to 15% from 2008 to 2009. Of course, a big driver has been the silver-backed exchange-traded funds (ETFs) such as the iShares Silver Trust (NYSE: SLV). For the first 10 months of 2010, these funds accounted for 58 million ounces in new demand.

Silver is still considered a currency alternative. In light of the massive budget deficits and the money explosion from the Federal Reserve’s QE2 (quantitative easing, part two), there is a strong case that silver will continue to see demand.

OK, so of the stocks in my table, which looks the best? While they all are quality operators, my favorite is Silver Wheaton. Nathan Slaughter, editor of StreetAuthority’s Market Advisor newsletter, was the first StreetAuthority expert to turn readers on to the stock. And with good reason: He thinks the stock is a better way to own silver because there are no storage costs, insurance or risks from derivatives contracts. [See: “Nathan Slaughter’s Top Stock of 2011”]

The company is not a traditional miner, but rather but a “streaming” company. This means it puts up capital for the future production of silver mines. The cost is usually about $3.90 per ounce and the contracts are multi-year. As a result, Silver Wheaton has tremendous leverage in its cash flow — especially when silver prices surge. There are no capital or exploration costs. It’s the kind of financial structure that would even impress Warren Buffett.

But Silver Wheaton has also built a diversified portfolio of mining properties in countries  like the United States, Mexico, Sweden, Argentina, Canada, Chile and Peru.

Action to Take –> On its face, Silver Wheaton’s shares are trading at lofty levels. The P/E ratio is at 43 and the cash flow multiple is 23.

But so long as silver continues to remain healthy, the valuation looks pretty reasonable. In the past quarter, the company saw a 55% increase in operating cash flow to $70.5 million. In addition, Silver Wheaton projects that its production will go from 23.5 million silver equivalent ounces (SEO) in 2010 to 40 million SEO by 2013. In other words, the company has much growth ahead.

P.S. — Using the same principles that helped trounce the S&P 500 for seven years, one of our top investing gurus, Nathan Slaughter, hand-picked all 10 of the stocks featured in his latest exclusive report, The Top 10 Stocks for 2011. These 10 stocks are not only poised to deliver above-average returns throughout the 2011 calendar year, but also in the years that follow…