The silver market is raising its profile via an exchange-traded fund (ETF) set up four months ago, and some analysts say silver prices may rise faster than gold in the long term.
Prices surged nearly 20 percent in a month to hit a 12-week high on Wednesday on concerns that growing popularity of the fund would suck in a significant chunk of the metal supply, whereas gold has risen just four percent in a month.
The ETF is certainly underpinning silver, which looks particularly good at the moment. I think silver has got more room to move on the upside, said Peter Hillyard, head of metals sales at ANZ Investment Bank.
Silver has remained strong since trading in the first ever ETF linked to the metal kicked off in late April. One of the reasons behind silver's recent rally has been increased demand stemming from the fund, analysts said.
Barclays Global Investors' ETF, called iShares Silver Trust, with the trading symbol SLV
Silver held in the ETF climbed closer to the 100 million ounce mark, rising to a record 97.9 million ounces (3,044 tonnes) on Wednesday - about 15 percent of global mine output of 640 million ounces a year.
If it continues to attract silver investment demand, it will have more of a direct impact on the price because there is much smaller above-ground stock for silver, said David Holmes, director, precious metals sales at Dresdner Kleinwort Investment Bank.
Identifiable silver stocks fell to 608 million ounces by the end of 2005 from 723 million a year earlier. It is also held by hundreds of millions of households in relatively small amounts.
In contrast, the total above-ground stock of gold - cumulative historical mine production - stood at 155,500 tonnes by the end of 2005, of which more than 50,000 tonnes were held by central banks and private players.
Silver doesn't have the currency aspect of gold and we also don't have huge levels of central bank holdings. So when silver gets taken off from the market, it has a bigger impact, said James Steel, analyst at HSBC Bank.
A significant portion of gold stocks are in the form of jewelry and could quickly come into circulation, while a large part of silver, which has industrial applications as well as being used to make ornaments, is tied up.
Most of silver goes into physical demand and doesn't come back so readily. Once it's been converted into an industrial product, it's no longer near market stock, said Stephen Briggs, economist at SG Corporate and Investment Banking.
Whereas gold jewelry is still relatively near the market, he added.
Analysts said the growing popularity of the silver ETF might have a serious impact on the market balance, prompting investors to take a bet on the metal traded in spot and futures markets.
The ETF is still attracting some underlying speculative interest, said Steve Platt, an analyst with Archer Financials.
This buying, as well as the rising stockpile of metal to back its shares, explains why silver has performed so much better than gold recently, Chicago-based Platt said.
Analysts said that the gold-silver ratio, which shows the number of ounces of silver needed to buy one of gold, has frequently indicated a strengthening silver market. On Thursday, the ratio was at 50 to 1, down from 60:1 late in 2005.
Silver is doing much better than gold and part of it might be because of the ETF. People are playing the ratio - buying silver, selling gold - and that's why It has outperformed gold, really, in the last few weeks, said a New York metals trader.
However, Paul McLeod, vice president of precious metals at Commerzbank in New York, believes silver's performance probably will not leave gold trailing over the long term.
I think the amount of potential silver to come to the market in the next three years from silver projects out there is significantly more than the amount of gold vis-a-vis their market sizes, McLeod said.
Historically, it's been a very volatile metal, so I certainly wouldn't rule out spikes ... but that's not really sustainable and I would think that silver somewhere in the $9-to-$12 range is a very reasonable level.