By Melissa Pistilli-Exclusive to Silver Investing News

According to many precious metals analysts, including Gold and Silver Investments’ Mark O’Byrne, tightness in the physical silver market “appears to be deepening.”

O’Byrne points to the recent 10 per cent drop in merely a few days in the COMEX Dealers Silver Inventory. If such drawdowns continue, it could signal a silver bull revival with spot prices rebounding to March 2008 levels in the near future. “Silver’s fundamentals remain as sound as ever if not sounder, and prudent investors should have an allocation in silver,” he advised.

Gold vs. Silver

There are signs in the precious metal market that silver may outperform gold this year, say analysts. Physical demand for gold from its largest consumer, India, is declining. The nation has become a net exporter over the last two months, reports Angel Commodities.  

“In India you have people who can only afford silver and people who will only buy gold,” said Ashok Shah, chief investment officer at London & Capital. “But, there are a large number of people in the middle who will rotate from gold to silver.” Such is likely to be the case around the world as the current recession depresses consumer spending.

Gold’s rising prices have made silver the default choice for jewellery purchasers and safe-haven asset seekers. And there are signals in the markets that commodities prices may be picking back up, which could also help industrial-use silver “pick up the momentum it needs to outperform gold,” said Reuters’ reporter Pratima Desai. While improvements in equities markets may dampen investor appetite for precious metals in the short term, silver will actually “remain relatively unscathed as it is used in industries such as electronics, aerospace and defence,” noted Desai.

Citigroup analyst David Thurtell sees the gold/silver ratio falling to around 1:50 to 1:55 near the year’s end. Analysts at ScotiaMocatta say the medium-range outlook for silver remains bullish. Commerzbank commodities strategist Eugen Weinberg expects silver prices to move up to $16 an ounce after the second quarter and sees “more scope for the price to rise than to fall.”

Silver Mining Shares

Despite silver’s obvious potential and strong fundamentals, silver mining shares have fallen behind those of gold, “which leads many to believe that silver mining companies will outperform going forward,” points out stock analyst Aryeh Katz. The upside potential for silver miners far exceeds that of gold miners, he added.

But, how to weed out the losers and pick a winner amongst silver miners? In a recent interview with The Gold Report, metals and mining analyst Leonard Melman of The Melman Report gave some advice to investors interested in the junior mining sector.

If you’re willing to take a little risk, Melman believes this sector has potential for significant returns over the next year. He points out that some juniors have already seen their shares double and in some cases triple, since bottoming out.

What differentiates those successful miners from those that have yet to recover? ” A sound treasury and the capital to conduct further investigations, to build reserves, and to participate in any big rally that comes in,” answered Melman. It seems to Melman that investors are ignoring those juniors who are stuck in “care-and-maintenance” mode. “If a company doesn’t have the money to conduct further investigation, they have nowhere to go at the moment. But the outlook could be very promising for those that have money, which can be identified by a study of their balance sheets.”