FiftyThree, the company behind both products, has created one of the best drawing apps for the iPad with Paper. It is delightful to use and extremely powerful. Whenever a new iPad owner asks me for the best iPad apps to get, Paper is the first one I recommend.
The Pencil looks like a carpenter's pencil and syncs wirelessly with your iPad so that you can rest your palm on the screen, use varying amounts of pressure to get different stroke widths, and use the back eraser to erase. If you use your finger while your Pencil is synced and active, it will work as a smudge tool, a tool not otherwise available.
At $50 for the graphite color and $60 for the walnut color (with a magnetic strip to attach to your iPad's SmartCover), the Pencil is extremely attractive in price and appearance.
My current favorite iPad stylus is the Cosmonaut by Studio Neat for $25. One of my only complaints about the Cosmonaut is that when you lay it on a table, it tends to roll of due to it's cylindrical design. FiftyThree seems to be addressing this problem with the carpenter-pencil-like design.
If the Pencil has the amount of design, delight, and polish of Paper, it will be a must buy for those who love to draw on their