Share By Melissa Pistilli-Exclusive to Silver Investing News

After posting continued gains Monday morning, commodities prices fell across the board in the afternoon as the dollar bounced back from last week’s 14-month low against the euro. The silver spot price had touched $17.80 an ounce before dropping as low as $16.98 to finally close down 3.4 per cent to $17.10.

Precious metal silver has been tracking gold‘s rally on an ever-weakening dollar. Despite today’s dollar rebound, the downward pressure on the greenback is expected to continue as long as the Fed keeps up its low-interest rate, paper pumping scheme. Economic data on unemployment, manufacturing, consumer confidence, new home sales, etc due out this week is likely to further influence the dollar’s direction and that of precious metals.

Signs of global economic recovery are also having an effect on the dollar and precious metals prices and that trend is sure to continue.

“A lot of people are looking at the performance of the dollar,” said Afshin Nabavi, a senior vice president at MKS Finance SA. “Traders are likely to buy on dips.”

While gold is up 21 per cent this year, silver has soared 56 per cent. However, despite outperforming gold, silver still remains undervalued compared to its yellow cousin. As a recent Bloomberg article points out, when gold first hit $1,000 an ounce, silver was trading above $20 compared to the $17 range today.

Investment demand for silver is robust. ETF Securities has announced holdings in its silver ETF gained over 200,000 ounces (1 per cent) Friday to a record 21.054 million ounces.

Let’s not forget silver’s industrial status and its close ties to Dr  Copper.  Silver has also benefitted from rising industrial demand along with copper, which reached a 13-month high on Monday morning trading, before reacting to the late dollar rally.

Strong appetite from Asia is helping to support prices of copper and its other base metal cousins. According to Reuters, copper demand from China was up 21 per cent in September from August.

According to Angel Broking analysts, the outlook for base metals “remains bullish as demand from developing markets of Asia and South America [prop] up prices, outweighing declining demand from the West.”

George Cheveley, Investec manager of a natural resources fund, told investors and journalists in a recent conference call that China’s “immense amount” of buying is one of the key factors in rising metals prices. “China is the dominating force now in the metal markets,” said Cheveley.

Copper’s strength is indicative of growing optimism in the industrial sector, of which silver plays a part. Industrial usage made up 50.3 per cent of overall demand for silver last year, up from 40 per cent in 2003. Industrial demand for silver will no doubt rise further as the global economy is anticipated to grow 3.1 per cent in 2010 according to the International Monetary Fund.

Many analysts are forecasting further dollar declines and continued optimism over global economic recovery, which will in turn boost precious metal and base metal prices. Of course, silver stands to benefit immensely from this scenario, given its dual nature as both precious and industrial commodity.

“All commodity prices will rise, gold, silver, copper and even cotton,” said Jim Rogers speaking Friday at the Global Economic Revival and Chinese Capital Market Summit Forum. “The whole world is starting to print bills…and there are clear signs of expected upcoming inflation.”  Roger’s expects this commodities bull to last at least 20 years.

Investec Asset Management expects precious metals prices to post further gains over the next six months.

Bank of America Merrill Lynch has said gains in the silver price spurned on by robust investment demand will continue as rebounding economies drive industrial demand. “After the recent sharp price rises, we are cautious on silver in the near-term, but we believe that a spike toward $20 an ounce is possible in 2010.”

Citigroup is also of the opinion that silver could possibly outperform gold next year based on rising industrial demand.  “Silver is set to benefit from stronger gold, but also the improving outlook for global industrial production,” said Citigroup analyst David Thurtell. “I think the gold-to-silver ratio can get to the low 50s.”

Silver mining stocks are, of course, benefitting from rising silver spot prices. Mark Brown of ETFTradingPartner.com offers readers an interesting performance comparison between an index of seven major silver stocks in the primary silver mining industry and the S & P 500.

The price-weighted silver stock index includes Buenaventura [NYSE: BVN], Coeur d’Alene [NYSE: CDE], Hecla [NYSE: HL], MAG Silver [AMEX: MVG], Pan American Silver [NASDAQ: PAAS], Silver Wheaton [NYSE: SLW], and Silver Standard Resources [NASDAQ: SSRI].

According to Brown, the index bottomed out at $5.27 in October of last year.  A few weeks ago, the index reached $19.85, “a gain from trough to peak of about 277 per cent in less than 12 months,” he points out.

Of even more interest, notes Brown, the silver stock index has outperformed the S & P 500 nearly three to one.

“While no one knows what the future holds for the broad market indexes or for the seven silver stocks in the index,” he says, “we do know that industry groups that outperform the broad market tend to continue to outperform.”

Brown also notes that precious metals are now “in major primary bull markets” and mining shares are known to rise “at a rate that is usually 200-400 per cent greater” than gains in physical gold and silver.

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