Can silver withstand a drop in the gold price?

Or will industrial demand come to its support

GRONINGEN -

Silver has become embroiled in the current hullabaloo around the gold price and commentators on both sides of the fence have predicted either that the price is going to rise rapidly or fall precipitously.

The main reason for this divergence of view points is that silver is both an industrial and an investible metal.

So, while it is often driven by speculation and investors looking to use it as a store of value, it is also used in jewelry, photographic equipment (albeit to a lesser and lesser degree), electronics, and most recently in so-called "health" products as an element with bacteria-killing properties- it is being found in everything from washing machines to socks.

At the moment, consensus seems to be that the current rise in the price is being driven by speculative investment into the metal as a hedge against ever more volatile equities and concerns about the nature of the economic recovery.

But, there is a belief in some sectors that the floor price of the metal is rising on the back of a better outlook for it from an industrial point of view.

So what does this all mean?

If one considers that the average price for silver for the last 10 years is about $8 an ounce, the current price of around $17 has already given investors serious outperformance, especially when one notes that, since mid-August, while gold has only gone up 8%, silver is up 22%.

But, such an exaggerated movement in concert with gold is not unusual, in fact, according to Matthew Turner, senior commodity analyst at the VM Group, when gold goes up, silver tends to go up even further but, when gold falls, it is tends to fall even more.

On the flipside, it is worth noting that, while in 2008, when gold made its previous all time high, silver was sitting at $20,92, this time round, there hasn't been as magnified a movement in the price.

Indeed, the correlation between the two metals can be seen well in the graph below,

Source: VM Group Silver Book April 2009

Asked if it is possible the increased industrial demand for the metal will help negate some of the decline seen in the price if demand for precious metals falls - particularly with gold hitting close to all-time highs, largely on the back of paper currency weakness, Turner is unsure.

"I would like to say yes," he told Mineweb, "But, I am not sure it will. In the greater scheme of things, the actual value of trade in silver is small and it tends to get pushed around by the investment market.

He adds that one of the important considerations to take into account is that there is still some uncertainty about the ascent of base metal prices.

"People are not sure yet how much of the jump in the price of copper and other base metals is the result of a real increase in demand and how much has to do with China's replenishment of its stockpiles and silver doesn't have a China restocking angle."

Another question that as yet does not have an answer is how many of the newer industrial uses for the metal are viable at a price of $17 an ounce? Something that has yet to be tested.