By Melissa Pistilli-Exclusive to Silver Investing News

The silver price was on quite a tear this last week. Ending the month of May up 27 per cent, the white metal posted its largest monthly gains since 1987. However, after reaching a 10-month high of $16.25 in overnight trading, silver’s rally ended as prices began to pullback under pressure from a stronger dollar, profit-taking and dented copper prices.

After falling against the euro for nearly a week, the dollar recovered from a five-month low on news out of Europe that the economy shrank 2.5 per cent in the first quarter and on reports that major Asian central banks will continue to purchase U.S. Treasuries even if the U.S. credit rating takes a cut.

The price of silver has been buoyed up not only by stronger gold prices and a weakening dollar, but also from recent bullish copper prices. As an industrial metal, silver often takes cues from the base metal market and copper usually leads the pack.

The copper spot price, which had recently reached its highest level in over seven months, also declined in price Wednesday after news that the U.S. private sector cut another 532,000 jobs in May. Copper’s decline signals a break in industrial metal demand, further hurting silver prices.

Investment Demand and Supply Shortages

This recent pullback in silver prices was expected by most analysts and confidence in a positive outlook for silver based on strong fundamentals still remains.

Silver price forecasts point to a continuation of the current uptrend for 2009 supported by increasing investor interest, rebounding demand for industrial metals, and flat output levels, said Dennis Wheeler, CEO of Coeur d’Alene Mines Corp.

“Silver is now being looked at as a separate asset class and as a safe haven, and some sense that the economy may be bottoming,” said Wheeler. “Silver is demonstrating its advantage both for investors and as a leading industrial metal.”

As proof of increasing investment demand for silver, Wheeler and others in the industry point to the growth of silver exchange-traded funds (ETFs). Earlier this week, holdings in the world’s biggest silver ETF, iShares Silver Trust SLV, hit a record 8,608.54 tonnes. Together, London’s ETF Securities and iShares hold over 310 million ounces of silver bullion, which is equal to almost half of the annual output for 2008.

For the first quarter of this year, iShares alone purchased more than 1,500 tonnes, said metals consultancy GFMS. Compare that with the total investment demand for silver in 2008, which was a mere 50 tonnes of silver.

“Silver, in terms of share of investment, on current trends could start to look more like the gold market,” said GFMS executive chairman Philip Klapwijk. “Silver is definitely becoming more of an investment-driven market.”

In 2008, silver investment demand accounted for a mere 7 per cent of total consumption. Klapwijk predicts that silver investment demand could make up anywhere from 20 to 25 per cent of total consumption this year.

Although the industrial and investment demand for silver is expected to rise, the supply side of the equation is expected to remain rather muted, adding more support to further price gains over the long-term. The financial crisis has led to stalled operations or closures at several silver mines as well as base metal mines where silver is taken as a by-product. 

“Nothing on the horizon is going to change that (flat supply), so we are going to have silver deficits over the long term by a considerable margin,” noted Wheeler.