Berlin, 28 September 2010

Silver, trading at 30-year highs, looks set to continue benefiting from strength in gold prices but is at risk of a correction if a sluggish economic recovery hurts industrial commodities, metals consultancy GFMS said.

Silver has benefited this year from a hefty rise in gold prices, which peaked at a record $1,300 an ounce earlier in the session, and are up some 18 percent this year. Silver hit a peak of $21.61 in earlier trade, its strongest level since 1980.

As well as riding gold's coat-tails as an investment metal, silver, which is used in industrial applications such as electronics manufacturing, has benefited this year from hopes industrial activity will recover after the recent downturn.

But if this fails to materialise, and if gold prices were to lose momentum, then the smaller and more illiquid silver market would be liable to underperform, GFMS Chairman Philip Klapwijk said on Monday.

"If there is a short term correction in gold, there will be a much bigger one in silver," he told Reuters on the sidelines of the London Bullion Market Association. "Silver is looking more toppy than gold."

"If you think gold will continue to advance in the medium term, then why wouldn't silver necessarily follow suit? One reason could be that if economic prospects take a bath, that side of the argument for silver becomes a lot weaker."

"In the current situation, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold."

FUNDS BUY

Silver has benefited from rising interest from the fund community, particularly in the United States, Klapwijk said, where the white metal has historically had a higher profile as an investment metal than in Europe. "Amongst the hedge fund community (in New York) I saw quite a lot of focus on silver... for the reason of outperformance," he said. "In a narrow market... money coming into the market would have a proportionately greater effect of prices."

"Also, demand in silver is extremely price inelastic. If you see silver going to $30 an ounce, you are not going to see the supply response in the way you you would with gold," he added.

"In gold, there is scrap that can come back to the market quite quickly from jewellery stock." He said that for the moment the overall environment still looks positive for silver prices.

"Silver has definitely benefited recently from a bit more optimism about global economic prospects in general and specifically the view that China is looking stronger, and that emerging market demand will be particularly good," he said.

"Generally the positive sentiment recently has tended to win out over the negative," he said, but added that prospects remain for a double-dip recession.

"That, in fact, will eventually hove into view, and some of the optimism regarding economic prospects will dim a bit," he said. "That will probably have an effect on silver prices."

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