(Kitco News) - Silver prices are within striking distance of re-testing the 30 year highs set on Jan. 3 at $31.275 an ounce as silver benefits from industrial metal strength and tight physical supplies.

The March silver contract on the Comex division of the New York Mercantile Exchange is currently trading around $30.805, about 47 cents from the January high. Conversely, gold prices remain well-below their all-time high of $1,431.10 an ounce made on Dec. 7, trading around $1,373.

Silver’s dual-purpose as an industrial metal and a precious metal is giving it a boost as it follows the rally in copper to its all-time highs, said Mike Daly, precious metals specialist at PFGBEST.

“People are eager to invest in silver because of the growing industrial demand whereas gold has very few industrial applications beyond some electronics,” Daly said.

The platinum group metals have also benefitted from the growth in industrial metals and are overshadowing gold in this respect, said Commerzbank.

Silver’s cheaper price versus gold is also attractive. “It’s really the blue-collar metal. You can buy a lot of silver with $1,000 and no gold,” Daly said.

Frank Lesh, futures trader and broker at FuturePath Trading, said physical silver supplies are the tightest in four years and that’s helped push futures prices into a small backwardation, an unusual situation when the nearby price is higher than the deferred price.

Comex warehouse stocks are around 102.76 million ounces as of Tuesday. Reuters reported that at their peak, warehouse stocks were as high as 141 million ounces in June 2007. Silver coin sales from various worldwide mints have also been strong.

Lesh said it’s hard to say whether or not silver prices will stay in backwardation. “I don’t know about that yet. You can get into backwardation and you can come right out,” he said, noting that recently the crude oil market was only in backwardation briefly.

Silver has also benefitted from some speculative buying, he noted, as gold has fallen a bit out of favor. “The gold market has matured, so it’s harder to see that we’ll have the same gains from gold this year that we did last year. It’s not to say it won’t gain ground,” he said.

He noted that many of the big index funds rotated out of gold and into silver and copper, too.

Daly said the silver market has seen a big increase in volume compared to years past and that’s helped to stabilize the market somewhat, making it less volatile. Meanwhile, volume for gold has shrunk. “Gold volume on Globex two weeks ago was anywhere from 180,000 to 200,000 contracts daily. Yesterday it was 85,000 contracts. But silver’s volume has increased…. It’s now half of gold’s volume and that hasn’t happened in forever. It used to be 10%, 20%,” he said.

He also credits the increased margin the CME Group requires silver traders to have in order to have an account, saying it helped with stability as it kept out some of the less well-capitalized traders.

Price Outlooks

Daly said he expects silver prices could reach $35 by the summer.

Lesh said silver prices should be able to pierce the recent $31.275 high, although $31 will offer some psychological resistance first. He believes silver could eventually trade up to $50, but before that happens, silver will likely try to expand the trading range if it can break through the recent high. The next target is the $31.50 area. “Let’s see how it trades there. We’ll see what develops,” he said.

 

By Debbie Carlson of Kitco News dcarlson@kitco.com

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