After dropping almost 60% from its March 2008 peak of $21/ounce, silver appears to be on the rebound: Silver gained 24% back in the first quarter of 2009.

With a track record of strong performance during economic crises, silver seems particularly well poised to weather the current storm, especially the impending threat of inflation. Even our own Brad Zigler pointed out the potential staying power of the silver rally way back in February.

But if silver has so much potential, why is it still so hush-hush among investors?

"Frankly, I don't know," says David Morgan, founder of the Silver Investor and editor-in-chief of the monthly precious metals research guide, "The Morgan Report." As one of silver's most vocal bulls, Morgan has spent more than 30 years educating investors about this often-overlooked metal.

"Personally, I suspect people don't gravitate to silver because the market is so misunderstood," Morgan said in an interview last week. "They just don't understand the how, the where and the why."

Silver: The Green Metal

Unlike gold, says Morgan, which is useful predominately as a store of value, "silver has a dual personality, as both an industrial and monetary asset."

Silver's innate physical properties make it an ideal ingredient in several industrial applications. As nature's best electrical and thermal conductor, the metal is perfect for high-performance electronics or high-voltage circuits. Silver's high reflectivity makes it a must for fine-precision optics, and photosensitive silver compounds are the engine behind photographic film. The metal is even a natural biocide, which is handy in sterilization and treating wounds.

Given silver's valuable characteristics, it's not a big surprise that industrial demand for the metal has risen every year since 2001. The industrial sector now accounts for 54% of global silver usage. (The remainder breaks down into luxury demand - namely, the jewelry trade - and investment demand.)

"Not only is industry the fastest-growing segment of demand for silver, it's also the largest," says Morgan.

Demand could continue to grow long term, since silver is a component in many up-and-coming "green" technologies. Photovoltaic cells in solar arrays require silver coatings. Water purification plants use silver compounds to prevent bacteria and algae buildup. And super-efficient, eco-friendly silver-zinc batteries may soon supplant their lithium-ion cousins in the rapidly growing electric car market.

"Silver is a very clean metal, a very green metal," says Morgan. "And it's also inelastically priced: For some applications, no matter how you price it, you have to use silver."

Another growing demand comes from silver ETFs, which despite their relative newness, have attracted a significant following among individual investors and institutions, like pensions and insurance companies (which can't access the derivatives market). Combined, the silver ETFs added 63.5 million ounces to their stocks throughout the first three months of 2009, and the iShares Silver Trust ETF (NYSE Arca: SLV) now holds over 270 million ounces of fine silver - roughly three-fifths the total silver stocks, says Morgan.

Fig. 1: Historical Silver ETF Holdings

Source: "The Silver Investment Market Report," GMFS, April 2009

"Silver ETFs are far more of a dominant factor in the silver market than gold ETFs are in the gold market," he says. "Gold's just a much bigger market."

What Copper Has To Do With It

Approximately 70% of the silver mined each year is actually by-product, extracted from alloys and ores of gold, copper, nickel, lead and zinc. That means base metals miners and the big diversified natural resources companies often have great control over silver prices - for better or worse.

"If you're a copper miner, you don't care about the price of silver. You just pass it off to your bank for them to sell at any price they like. That puts a lot of pressure on silver prices," explains Morgan.

However, as the global recession has dampened industrial demand worldwide, there has been decreased activity among base metals producers. Less metal being mined means declining silver stocks; the COMEX Dealers Silver Inventory fell sharply between November 2008 and March 2009, dropping from almost 80 million ounces to roughly 70 million.

Additional disturbances in the base metals supply chain could benefit silver's prices further. For example, if the swine flu outbreak becomes a significant pandemic, it could cause supply disruptions from Mexico, which is the world's second-largest silver producer.

Silver, Gold And The Inflation Question

Historically, the fortunes of silver and gold have been inextricably linked, due to their shared use as stores of value. But even though the metals are almost 85% correlated, they're not interchangeable assets.

"Gold's monetary role is primarily in the doom-and-gloom market: If the financial system explodes, then gold will protect you," says Morgan. "Silver, on the other hand, is the best 'good-time' metal out there, because it's used in so many high-tech, high-end products."

Currently, the gold-silver ratio hovers around 70, although in the past few years it has ranged anywhere from 30 to 100. But in 1792, back when the metal was still used for money worldwide, U.S law fixed the ratio at 15.

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