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Projecting prices of precious metals is a difficult and likely futile task. Gold bugs seem to insist there's always room for further appreciation, while others proclaim that gold has been in a 6,000-year bubble.

The truth is probably somewhere in between, but discovering the worth of a precious metal based on some intrinsic valuation of it is virtually impossible. There are no future interest or dividend payments to project and discount, so we have to rely on the madness of humans.

Unlike equities or bonds, commodities like gold and silver bullion are nonearning assets, worth only what another party is willing to pay. Commodities do, however, offer diversification benefits that can be reaped when other securities markets are performing poorly.

In other words, commodities can have a role in your portfolio even if you have no opinion on future prices.

When considering bullion funds as long-term core holdings, we recommend a weighting of 4% of total assets, if at all. Our research suggests that a 4% to 10% total weighting for all direct commodity exposure is sufficient, and the majority of that weighting should be split among energy, agriculture and industrial and precious metals.

That said, precious metal funds can be used periodically as satellite holdings for an inflationary hedge, or as a store of value during periods of currency valuation uncertainty.

It's all relative

Instead of trying to justify the prices of commodities on an absolute basis, speculators often consider the relative valuations of commodities -- how they are valued against one another.

That's the approach we took in November 2009, with a recommendation that those considering an investment in precious metals lean toward silver over gold. That trade looks a little rich today, and we now favor gold over silver (and stocks over both).

Silver prices have climbed 88% since our recommendation, and gold is up 27%. Granted, both outpaced the 19% gain posted by the Standard & Poor's 500 Index ($INX), so you would probably feel pretty good about either investment.

Over the trailing six-month and one-year periods, SPDR Gold Shares (GLD, news) maintained correlations to the broad equity space of roughly zero and -0.20, respectively, while iShares Silver Trust (SLV) saw slightly higher correlations of about 0.20 and 0.30, respectively.

Daily correlations have remained very low, and the funds served well in providing a level of portfolio diversification. That said, and considering that both stocks and precious metal offerings have been moving in the same general direction since March 2009, the correlation argument begins to break down when performance is measured over longer incremental horizons.

In November 2009, the price of an ounce of gold was roughly 64 times greater than that of an ounce of silver. Some insist that the centuries-old gold-to-silver ratio of 16-to-1 still carries weight, but the average ratio in the past 30 years sits at just about 63-to-1. That ratio has been severely depressed, having fallen to just under 40-to-1 today. Silver has been this expensive relative to gold only twice in the last 25 years. Both of those instances lasted just a few weeks before the ratio normalized.

You would have to venture back to the 1970s to find any length of time when silver remained more fashionable than it is today.