Silver returns outpace gold in 2009 but traders wary

Investors in silver have reaped glittering rewards in recent months as prices soared, but with the bulk of the gains driven by speculation rather than industrial off-take, the market could be at risk of a sharp correction. The metal has benefited so far in the second quarter from a recovery in industrial commodities, which has added to the momentum lent by rising gold prices.
But if the temperature of the investment markets dips, silver prices could plummet. "The silver market is not as deep or as liquid as the gold market, so if we were to have a change of view on the part of investors, it would cause quite a traumatic price correction," said Stephen Briggs, commodity strategist at RBS Global Banking & Markets.
"For as long as investment buying continues, silver will do well," he said. "(But) it is a very risky play." The metal, which unusually is seen as both an investment vehicle and a raw material, climbed 14 percent in the first quarter as investors bought it as an alternative to gold, to hedge against dollar weakness and volatility in other markets.
As industrial commodities also started to recover in the second quarter, prices have jumped still further. Spot silver traded as high as $16.22 an ounce early on Wednesday, up 43 percent from $11.31 on January 1. Its gains far outstrip gold's 12 percent rise, while the gold/silver ratio has dropped from 78 at the beginning of the year to around 61.
The rise is largely due to a fresh wave of investment demand, as funds and other investors buy into silver futures and physically backed exchange-traded funds. "Silver, in terms of share of investment, on current trends could start to look more like the gold market," said Philip Klapwijk, executive chairman of metals consultancy GFMS. "Silver is definitely becoming more of an investment-driven market."
According to GFMS, investment accounted for only 50 tonnes of silver demand in 2008. In the first quarter of 2009, buying by the biggest silver exchange-traded fund, the iShares Silver Trust, alone hit more than 1,500 tonnes. That has continued, with London's ETF Securities' Physical Silver fund and Zurich Cantonal Bank's Physical Silver product, the leading European silver ETFs, adding another 99 tonnes to their holdings in May.
INVESTMENT SOARS The growth in investment demand for silver is such that it could account for between one quarter and one fifth of total consumption in 2009, Klapwijk said, against negligible levels at the beginning of the decade.