Virtual Metals Group

Media/Press

UPDATE 1-Silver returns outpace gold in 2009

LONDON, 3 June 2009 (Reuters) By Jan Harvey

Investors in silver have reaped glittering rewards in recent months as prices have soared, but with most 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 is unusual in that it is seen as both an investment vehicle and as 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 (ETFs).

"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.

As well as the sharp climb in silver ETF holdings, net long positions -- or commitments to buy -- in silver on the Comex futures exchange in New York rose last month to the highest since August 2008, suggesting keen speculative interest.

In addition to its appeal as a proxy for gold, silver is also taking a fresh leg higher from renewed optimism over the outlook for the global economy, which is helping the outlook for industrial metals.

"Silver has completely out-paced gold, because it was gaining at the same time from gold going up, and the base metals going up," said Matthew Turner, an analyst at VM Group.

While industrial and photography demand, responsible for nearly two-thirds of total silver consumption last year, languished in the first quarter, there are signs this could be picking up, Klapwijk said.

Meanwhile supply is expected to decline modestly this year, with mine output, scrap and government sales all softening.

With much of the fresh investment since the start of 2009 having flowed into ETFs, from where it can quickly be re-sold on to the market, and futures, some say prices are vulnerable to a sharp correction if funds decide to off-load their holdings.

But for the moment, silver is shrugging off underlying weakness in demand as investors bank on further gains in the metal on the back of rising gold prices.

"Silver has more appeal to investors because although the gold price is trading right now just below all-time highs above $1,000, the silver price is still some 200 percent below its highs from 1980," said Commerzbank analyst Eugen Weinberg.

"Silver is definitely a riskier investment than gold, and it has some investment and speculative appeal," he said. "That is what is driving the prices, and driving demand."

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