'Should I invest in silver?'

(Money Magazine) -- Is investing in silver a smart thing to do now? -- Mary, Holland, Michigan

Hi ho, Silver! Away! With the price of silver galloping along in recent months, the Lone Ranger with his silver bullets would be one rich dude today.

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And that's despite a big slide in the price of silver in the past few days. Since August of last year when sterling really began to take off, the value of the iShares Silver Trust ETF has soared some 125%, with much of that increase coming in the past three months.

The iShares Gold Trust ETF, by contrast, has gained "just" 30% since last August.

What's been driving this frenetic rise? Precious metals traditionally do well in times of great turmoil. And there's no shortage of that today: witness the ongoing political upheaval in Libya, Syria and elsewhere around the Middle East.

And even though there's no clear evidence that inflation is ready to spike, the seeming inability of the federal government to get control of spending and deal with looming budget deficits creates a demand on the part of some investors for traditional inflation hedges like gold and silver.

That said, I also think a lot of silver's recent gains are the result of a self-reinforcing feedback loop. Silver prices climb, the rise gets talked up in the financial press, which attracts more investors, which pushes up the price yet more and starts the process all over.

Some people might call this a bubble in the making. So given all this, should you consider investing in sterling?

The trouble with estimating the future potential of silver and other precious metals is that there's no fundamental gauge for determining value. Precious metals generate no earnings. The value of silver as an investment is pretty much what someone's willing to pay you for it.

That's true for a stock too, except that, with stocks you can look at the profit potential of a company and then decide whether the stock price you're paying is realistic based on potential future cash flows.

It's possible that silver's ascent could continue if investors remain spooked about the future value of the dollar, inflation and political instability.

The death of Osama bin Laden at the hands of the U.S. military throws another wild card into the mix. Does it alleviate geopolitical risk, thus dampening demand for silver? Or create more fear over Al Qaeda's next move?

Truth is, no one really knows whether silver is going to continue its stunning rise, and whether the recent 10%-plus selloff will keep going.

But any reasonable person should be wary about any investment that's up so much.

History shows that bad things can happen after such meteoric rises. Think dot-com stocks and Internet mutual funds in 2000 and house prices after hitting their peak in 2006.

And even silver has gone through these boom and busts. After doubling in price from $9 an ounce in early 2006 to nearly $21 in March 2008, silver fell back to just over $9 in October, 2008, a decline of 57% over the course of seven months.

Again, I don't know what comes next, but it's important to understand that the potential for a drop is there. To me, all this says that getting on board now is a risky proposition at best.

Even famed former hedge fund manager-commodity investor-motorcyclist Jim Rogers, who's owned silver for years, says he's not buying at current prices (although he's not predicting silver's downfall either).

Of course, if someone is truly convinced we're in a silver bubble and that a collapse is imminent, there's always the option of selling short -- that is, borrowing silver and selling it in hopes of making a profit by replacing the borrowed silver later at a cheaper price.

You could do that by shorting a silver ETF like the iShares Silver Trust or by buying ProShares UltraShort Silver ETF, which aims to deliver twice the opposite, or inverse, performance of silver on a daily basis.

But to my mind shorting is even more risky. With conventional shorting, the possibility of having to put up more money if silver climbs rather than falls heightens the potential for loss.

And the methodology short (and short leveraged) ETFs like ProShares UltraShort Silver use to calculate their gains can be so confusing that investors may not end up with the gains they expected even if they make the right market call.

If you're considering silver because it's the talk of the investing world, I'd urge you to think about whether you're really making an informed investment or just following the herd.

I suppose you could rationalize buying silver today as a way to diversify your portfolio and hedge against inflation. But, frankly, if that's your real goal, you can accomplish it more easily and effectively by adding some TIPS, REITS or a natural resources fund, all of which you can find on our MONEY 70 list of recommended funds.

Bottom line: I just can't get very excited about silver. If that means missing out on an investment that goes on to rack up even more spectacular returns, that's no biggie to me.

The key to successful investing is to build a diversified portfolio that can perform decently over time in a variety of market conditions, not try to guess whether a niche investment that's all the rage will continue to sizzle or fizzle.