Can the Boom in Silver Last? (SLV, SIL, SLW, PAAS, HL)

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Silver prices have risen more than 80% in 2010, far more than either gold, at about 26%, and copper, at around 28%. Aside from speculation, there are a couple of reasons for the enormous jump in silver prices.

Hard assets are in big demand from investors. Gold, silver, copper, and other commodities look much safer than equities as a hedge against future inflation. Silver, like gold, is both a precious metal and an industrial commodity. However, a far larger portion of the world’s supply of silver is used in making things than is the world’s supply of gold.

The amount of silver that is purchased for investment reasons has historically been very low, only 5% in 2008. That number jumped to about 15% in 2009, as investors bought into silver funds like the iShares Silver Trust ETF (NYSE: SLV). The Global X Silver Miners ETF (NYSE: SIL) offers investors a play on silver miners like Silver Wheaton Corp. (NYSE: SLW), Pan American Silver Corp. (NASDAQ: PAAS), and Hecla Mining Corp. (NYSE: HL).

Demand for hard assets is one thing, but price is another. At one point in 2009, the ratio of silver to gold was above 72:1. At current prices, one ounce of gold buys about 42 ounces of silver. The price differential is attractive to many buyers, which makes silver what’s often called ‘poor man’s gold.”

As gold prices have risen this year, the faster rising silver prices have closed that differential and offered investors a much higher return. The rising prices depend on new money from new investors who are looking for a commodity play and a hedge against inflation.

Still, silver prices can fall almost as rapidly as they have risen because investors can be a fickle bunch. If new investors don’t feed the silver market, price rises will taper off and eventually become stagnant or worse.

Paul Ausick