Silver’s Run Quietly Gains Momentum

New fears over the U.S. dollar’s vulnerability - warranted or not - have been a boon not only to gold prices, but its more affordable inflationary hedge silver.

The white metal is up roughly 10% since Money Morning’s Sept. 28 analysis of silver with futures trading as high as $17.71 this morning on the New York Mercantile Exchange (NYMEX).

While gold rightly gets ample amounts of mainstream media coverage as investors look for a reliable hedge against a weakening dollar, silver is quietly making a bull run to $20 - or higher.

Silver’s investment potential is best measured by the silver-gold ratio, or the price of gold divided by the price of silver. Over the past five years, the ratio has held fairly steady, requiring 55 ounces of silver to buy an ounce of gold. Earlier this year, as gold increased at a faster rate than sliver, the ratio skyrocketed to 70 to 1. It has since corrected to around 60.

Silver’s industrial uses are many: It is found in everything from socks to wash machines, and is in development as a wood preservative that could replace the long-popular chromated copper arsenate, according to The Wall Street Journal.

The worst economic downturn since the Great Depression has cooled off industrial demand for silver, with its use in such applications dropping to 447 million ounces in 2008, down from nearly 454 million ounces the year before, according to the Silver Institute, a non-profit association. London-based precious-metals consulting firm GFMS Ltd. says fabrication demand in 2009 is weaker still and will mark a multiyear low.

Silver investors shouldn’t count on industrial demand to pick up the slack if silver’s appeal as a currency hedge evaporates.  Should that happen, silver prices would drop “because industrial demand won’t grow fast enough to match the loss of the investor,” GFMS Research Director Neil Meader told The Journal.

There’s no shortage of talk on replacing the dollar as the world’s reserve currency, particularly in China, a nation that is encouraging its citizens to buy silver bullion as an investment opportunity.

Analysts say silver has been undervalued in the last few years, and is a good investment for individual investors, according to state-run China Central Television (CCTV).

Investors have put almost $826 million into the iShares Silver Trust (SLV) exchange-traded fund (ETF) this year, according to market research firm Lipper FMI. That’s close to equaling 2008’s total amount of $911 million invested in the ETF.

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