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What About Silver?

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Gold has been on a tear, but so has this metal. What's next?

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While the yellow metal has captivated our attention in recent weeks, the "poor man's gold" has also been quietly reaping big gains.

Silver is up 56% this year, hitting a record of $17.92 a troy ounce on October 8, according to Bloomberg data. Silver's annual average price, in 2008, was $14.99.

After the recent run-up, commodity strategists think the metal might be due for a pullback. However, investment pros expect silver to remain a strong performer looking ahead, benefiting from two broad trends: First, analysts expect better-than-expected supply-and-demand conditions to benefit silver. Second, the market will continue to see silver, like gold, as ultimate money.

Why has silver rebounded so dramatically?

There are some strategists who view silver as a bet on economic recovery.

As the financial crisis erupted in 2008, demand for silver took a hit as sales by major end users -- like producers of big-ticket consumer goods such as household appliances and cars -- slumped and residential construction fell.

The use of silver in industrial applications fell to 447.2 million ounces in 2008, down from 453.5 million ounces the year before, according to The Silver Institute, a nonprofit industry group.

GFMS, a London precious-metals consulting firm, says that fabrication demand was even weaker in 2009, but it's forecasting a rebound in 2010.

"In the beginning of 2009, in all stages of the production process, people ran down stocks because they didn't know what was happening," says Neil Meader, research director at GFMS. "Now, we are getting back to the stage when demand should be normal in a sense."

Meader adds, "We will still have the negative of final consumption being slack, but we'll have the positive of the supply pipeline refilling."

Its industrial uses have had an impact on silver prices, but investor activity has also played a critical role in the metal's rally in recent years, say industry experts.

This year, investors have already put $750 million to work into the iShares Silver Trust (SLV), according to Morningstar. In all of 2008, investors sunk $829 million into that vehicle.

The exchange-traded fund is up 43% in the past six months.

The stocks of some mining-related companies have also enjoyed nice runs. Over the last six months, Canada-based Silver Wheaton (SLW) is up 78%; Pan American Silver (PAAS) has surged 68%.

For his part, William Fleckenstein, president of Seattle-based Fleckenstein Capital, doesn't think silver's move has anything to do with a bet on economic recovery kick-starting industrial demand. Rather, he says, investors have moved hard into silver for the same reason they've committed capital to precious metals in general: They have no faith in the purchasing power of the paper in their wallets.
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No positions in stocks mentioned.
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