To put things into perspective, just six months ago there were brave predictions that silver could surge to as high as $US23 per ounce during 2011. Well, it didn’t take nearly that long, with the metal surging past the $30/oz mark late in 2010 and currently settling around $27/oz.
 
Silver really has been an amazing performer in the precious metals space, strongly outperforming gold, particularly over the past half-year or so. Spot silver surged by 80% during 2010 to a peak of $30.50/oz, its highest price since September 1980.
 
This easily beat gold’s 24% increase to a recent peak of $1424.60/oz. And silver has also outperformed most of the base metals, with the exception of tin’s 60% price surge during 2010.
 
What’s been driving silver? Silver’s attraction is best summed up by this description we recently came across: “You buy gold when you think the world is going to hell in a hand basket. You buy copper when the economy is booming. In between those two, if you’re a bit confused, you buy silver.”
 
The same factors that have seen the gold price surge to record levels this year – weakness in the US dollar that shows no sign of easing, combined with investor nervousness related to the ongoing “quantitative easing” taking place in the US – are also driving silver. (Quantitative easing is a modern euphemism that refers to the money-printing, low interest rate spending spree currently being encouraged by US authorities.)
 
With money being pumped into the system, the inevitable questions that follow are how and when all this “free money” will be repaid. The answers are just too horrible to contemplate, with mammoth inflation being just one of the uncomfortable likely consequences.
 
As a result, many sensible investors have been loading up on gold since the global financial crisis. But this is only part of the picture, as there were other sensible investors that saw the writing on the wall long before 2008’s meltdown. In actual fact, demand for gold has been rising since 2000, which helps explain why gold is about to register its 10th consecutive year of price gains.
 
And as gold has become more expensive, investors have looked for cheaper alternatives, including gold’s relatively poor cousin, silver. For guidance we can look at the gold-silver ratio, or simply how many ounces of silver you can buy for each ounce of gold. Growing investor demand for silver over recent months is reflected in a decline in the gold-silver ratio.
 
An ounce of spot gold currently buys around 49oz of silver, which compares with the decade average of 62oz. Many investors obviously like the leverage factor that silver offers compared to gold, believing that any future gold price movements will be magnified in silver.
 
Strong silver demand is reflected in exchange-traded fund silver holdings, which have surged since the middle of 2010, rising by almost 100 million ounces and approaching 500Moz.
 
Even the Perth Mint anticipates that silver-coin sales will climb, perhaps by 50% this year.
 
Bloomberg recently quoted the mint’s sales and marketing director, Ron Currie, as saying that, “There seems to be more upside with silver than gold right now.” And the Royal Canadian Mint has said that silver-coin sales will also jump more than 50% this year.
 
And it’s not only investor demand, but also an expected recovery of industrial demand for silver, with the metal used in solar cells, mobile-phone covers and photography, which underpins 80% of demand. Silver is a great investment because it doubles as a store of value for buyers concerned about the economy and as an industrial material for those bullish on growth.
 
Half of silver demand, or 435.1Moz, goes into industrial applications including electrical conductors, alloys, solar panels and batteries, says GFMS Ltd. According to Barclays, industrial demand for silver would rise by 14% in 2010.
 
New applications, such as plasma screens, are compensating for a drop in demand for film, which now accounts for 9% of usage, down from 24% in 2000, data from GFMS shows. Eastman Kodak Co said last year it would stop making Kodachrome film after more than seven decades.
 
Meanwhile, the Brussels-based European Photovoltaic Industry Association believes solar-panel installations may jump by 44% this year to about 33 billion watts of capacity, enough to supply about 66 million European homes. Crystalline silicon solar panels use as much as 0.12 grams of silver per watt of capacity. Silver accounts for about 35% of a silver-oxide battery and as much as 40g of silver are used in a 32-inch plasma TV screen, according to VM Group.
 
Nevertheless, while we’re hugely positive on gold and as a consequence silver, we’re not as wildly bullish on price as some of the silver pundits out there. Price calls of $400/oz in the near future by some wild silver bulls are quite ludicrous and impossible to justify, merely setting some investors up for inevitable disappointment.
 
Silver’s fundamental demand (excluding investment) should continue to rise next year, chiefly due to gains in industrial uses. However, this will be outweighed by gains in total supply as mine output rises (both scrap and government sales are projected to fall). Nevertheless, with key supports such as ultra-low interest rates, a weakening US dollar and a buoyant gold market, we are confident that investors will be of a mood to absorb the resultant, growing surplus.
 
We believe that gold will comfortably surpass $1500/oz during 2011 and that silver has every chance of stabilising around $30/oz.
 
* This article has been provided by Gavin Wendt, founder of www.minelife.com.au.