BMO Global Commodity Strategist Bart Melek asserts factors are in place to keep the silver bull running for the next three years.

In a recently published analysis, Melek advised, BMO expects gold to be a strong performer for at least the next three years, with silver following suit and perhaps even outperforming gold.

The recent rally in silver to around U.S. $14 an ounce suggests the gold times for silver may continue, he said. The price of the metal surged despite waning industrial demand, a high U.S. dollar and ebbing inflation.

Silver's recent outperformance suggests that the market may be starting to see it as it sees gold-as ultimate money, he added.

BMO Research forecasts silver to average $12 an ounce in the first half of this year, $13.50 an ounce in the second half of the year, and $14 an ounce in 2010. The long-term forecast continues to be $12.50/oz.

However, Melek noted, The expectation that silver fabrication demand will drop 5-8% (lower industrial use and sliding jewelry sales) this year has reduced investor appetite for silver relative to gold. The market was concerned that lower demand would precipitate a considerable inventory build. However, this proved not to be the case on the COMEX-stocks have actually dropped 12% to 124 million oz. from the most recent August 2008 high.

Meanwhile, Melek suggested, Mine site developments weaken the argument that there will be large amounts of silver coming into the market as a result of base metal mining. Zinc, lead and copper product cutbacks/suspensions are likely to limit by-product silver growth for the next two years.

In fact, an analysis of lead/zinc curtailments points to a decrease in silver supply of over 15 Moz in 2009 and 8.75 million ounces in 2010. This leaves primary supply growth which, like other parts of the industry, continues to be hit by the credit crunch and concern on the demand side-not to mention the lack of high quality projects in the pipeline, he advised.

Although BMO Research expects base metals and silver to be under selling pressure in the first half of this year, Melek forecasts a modest turnaround later on this year. This view is being driven by more positive facts on the ground and expectations that aggressive fiscal and monetary policy interventions will yield positive results.

Melek also suggests that greater stability and better economic prospects will help jewellery and silverware markets later in 2009. Strong demand and moderating manufacturing inventories, along with slower supply growth could be the catalyst that persuades investors that a large over-supply is not pending.

With over-supply concerns starting to abate, silver could continue on its recent trajectory and become more precious, or gold like, he claimed.

Melek said the amount available for silver investment is quite small-likely 50 million to 100 million ounces at the most. This is a pitifully small market, especially when compared relative to the amount of future paper that will be flying around looking for a home.

He concluded that mined silver is insufficient to balance the market and it will be the investor who provides the marginal ounces. If investors choose to buy silver as a hedge in turbulent times, they will not want to give up their real assets like silver easily. This implies firm prices for silver.