Share By Melissa Pistilli-Exclusive to Silver Investing News

Precious metals prices profited further from a weakening US dollar and rebounding oil prices at the beginning of this week.

Gold rose as high as $1044.80 an ounce Tuesday morning and silver performed well reaching as high as $17.43 an ounce.

Silver Price: Based on Precious or Industrial Metal Role?

There are questions in the market as to whether or not government fiscal policies will lead to inflation, at what pace can we expect global economic recovery to advance, and if we will see a return to the levels of growth in commodities demand that the world experienced prior to last year’s crash.

How these factors will influence the silver market is being debated as well. Silver’s dual role as both precious and industrial metal makes it difficult to determine its future price direction.

Factors such as dollar strength, overall commodities prices, above-ground supply, inflationary levels, economic growth or stagnation, mining operations, and industrial demands can all influence silver price direction.

As gold prices rise in response to a weakening (some would say faltering) dollar and rising inflation concerns, silver will undoubtedly prosper. But, if investors see no prospects for global economic growth on the horizon, won’t a perceived lack of industrial demand swallow those gains?

If economic growth rockets to a rebound, isn’t silver likely to see soaring prices as industrial demand heats up, or will silver suffer from returning risk appetite and dropping gold prices?

Or more simply: what matters more? Silver’s precious metal status or its industrial role?

Silver as Precious Metal

Silver is often referred to as “the poor man’s gold” because like gold, it holds monetary status and its low price relative to gold makes it much easier to acquire. Generally speaking, silver tends to track the price of gold especially when investment demand for safe haven assets is in play.

Because the market for silver is small compared to gold and also influenced by industrial demand factors it is much more volatile. This volatility leads it to outperform gold in the good times and fall much more sharply in the bad.

There are those who strongly believe silver’s price actions over the last year are primarily the result of its precious metal characteristics. The threat of rising inflation and the possibility of a collapsing dollar have certainly prompted many investors to seek shelter in physical bullion, ETF’s and COMEX positions.

Even more risky silver mining plays have benefited from the latest push in silver investment demand.

It has been suggested by some analysts that silver’s current uptrend is based more on its relationship to gold and its precious metals status than industrial supply and demand fundamentals.

If that’s true, an erosion of inflationary fears and a stronger dollar over the long-term could see silver declining sharply and possibly “into the single digits again,” according to John Reade, UBS metals analyst.

Its industrial metal status won’t be able to save it because, says GFMS research director Neil Meader, “demand won’t grow fast enough to match the loss of the investor.”

While this bearish view may prove true for silver over the short-term, there are many who believe the long-term fundamentals for silver as industrial metal remain healthy and are likely to come into play as economies around the world recover and continue the strong growth experienced leading up to the financial disaster of 2008.

Silver as Industrial Metal

Interestingly, more patents with silver as a component have been issued than for all other metals combined. This is probably because silver is the best electrical conductor, most reflective and the second most malleable of all metals.

Silver’s numerous and diverse industrial uses include:

• As a natural biocide in clothing, food storage containers and even contact cases
• In radio frequency identification chips (RFID) for inventory and tracking
• As antibacterial nano particles in washing machines, refrigerators, and air conditioners
• As a safer alternative to lead in solder
• As a conductor in many electronic products
• In the preparation of auto catalysts used to control pollution from motorized vehicles
• As an anti-microbrial coating for medical devices
• In photovoltaic cells in solar-power generation

Also under-development are wood preservatives and rechargeable batteries made from silver.

Although industrial demand declined dramatically following the 2008 economic crash, it is expected to rebound in 2010 as economies recover worldwide and new applications for silver come into use.

Another factor to consider in supply/demand fundamentals is that above ground silver supply levels were also affected by the economic downturn as cash strapped mining companies cut exploration, development and production operations.

For now the push into safe haven assets and gold’s upward momentum may be enough to propel silver prices forward, but for the silver market to sustain price levels above the $16 to $17 range we’ll need to see a rise in industrial demand, say analysts.

A recovery in the electronic goods sector is what’s needed to “boost industrial demand for silver significantly,” says James Steel, HSBC analyst.

Precious metals investors and analysts have been looking to gold to gauge the direction of silver prices, but perhaps a better indicator of the market’s health is copper, a long-time economic bellwether and more closely aligned with silver’s industrial side than gold.

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