Gold versus silver. It’s a long-standing debate among precious-metal investors as to which commodity is a wiser investment. Both are seen as a hedge against inflation, as the prospects of ever-weakening currencies could send investors flocking to these hard assets.

Though both metals have slipped in value in 2013, the downward move in silver has been even more dramatic, and as a result, value investors are giving a fresh look to this inflation hedge.#-ad_banner-#

Did you know that 70% of the silver mined every year is used by manufacturing? That wasn’t always the case. But in recent years, a number of new products and devices require silver to perform basic electric functions, such as conductivity and resistance. In fact, the amount of silver used in consumer electronics has doubled in the past decade. More than 20% of the roughly 1 billion ounces of silver mined annually goes into consumer electronics devices alone.

Gold, on the other hand, goes right into vaults or jewelry and never really goes out of circulation. Indeed, the world’s stockpile of gold rises every year, undermining the case as an inflation hedge. After all, scarcity creates value, and gold is ever more abundant. 

Production of silver, for its part, must continue to be mined to keep up with demand, or the metal will quickly become quite scarce. Lastly, silver is a relative bargain: Gold has historically been worth 47 times more than silver, going back to 1900, though that ratio now stands at 55, suggesting silver is undervalued relative to gold by roughly 10%.

Ways to invest
There are a number of silver-mining stocks to consider, but Silver Wheaton (NYSE: SLW) is often considered to be “best of breed” in this group. Indeed, anything you might want in a mining company can be found here, including:

• A path to higher production that should increase output 70% by 2016, according to management.

• Very low production costs of just $4 per ounce.

• A sturdy balance sheet with nearly $700 million in net cash (and another $400 million available on its credit line) that is leading management to focus on acquisitions that can augment organic growth.

• Surging free cash flow, which has risen from $166 million in 2009, to $320 million in 2010 and to $563 million in 2011. This number could exceed $750 million in 2013 and hit $940 million by 2014, according to Merrill Lynch.

• Return on equity (ROE) and return on invested capital (RIOC) on track to exceed 20% in 2012

So how do you value a stock like this? Well, North American precious-metal mining stocks have historically traded between one and three times the net asset value (NAV) of their mines, with a 30-year average of two, according to Bloomberg. Right now, Silver Wheaton trades for 1.2 times NAV, so a move up to two represents 50% upside for this stock. If silver prices strengthen in 2013, then that multiple could move above the historical average of two.

The ETF route
If you prefer to focus more squarely on silver prices and not the silver miners, then there are multiple exchange traded funds (ETFs) available. The iShares Silver Trust ETF (NYSE: SLV) is the most popular, trading more than 10 million shares per day and with just less than $10 billion in assets under management.

Yet if you’re especially bullish on silver prices, then why not leverage up with the ProShares Ultra Silver ETF (NYSE: AGQ)? This fund trades more than 1 million shares daily and moves at twice the rate of the underlying spot price of silver. A quick glimpse of the stock chart for this ETF shows a fairly broad trading range: Shares have fallen 34% since peaking in February 2012.

Risks to Consider: Silver prices may fall if sales of consumer electronics slump in 2013, as demand forecasts would not be met. 

Action to Take –> Silver was largely range bound in 2012, mostly moving in a tight $30 to $35 an ounce range, though it has recently slipped below $30 an ounce. But if the global economy perks up a bit in the United States, led by China and the United States, then silver may quickly head toward the $40 an ounce mark. Considering silver hit almost $50 an ounce in early 2011 when the global economy last showed signs of growth, then a move to $40 seems quite feasible.