By Melissa Pistilli - Exclusive to Silver Investing News

^[1]Silver experienced a short rally on Wednesday, climbing 36 cents to $14.85/oz, as the dollar fell from a six month high against several other currencies, oil rose slightly, and U.S. equities traded lower. But, in New York late yesterday silver lost those gains and much more falling to $12.81/oz. 

Dollar resurgence and further drops in oil to $113 ^[2] a barrel have tarnished the precious metal's alternative investment appeal and role as a hedge against inflation. "Worried selling has cascaded into the blind panic that we have witnessed over the past few days," says precious metals analyst, Clive Maund ^[3]. MF Global analyst, Edward Meir ^[4] says, "The bears are back in town. They are here in full force and doing lots of damage. It's going to be a pretty ugly Friday and Monday."

Many believe the immediate root cause for the depression in precious metals is growth in the dollar. Yesterday, the dollar reached another six-month high against the euro following data that revealed the European economy contracted in its second quarter. Heading into its fifth weekly gain, the dollar has risen 5.3% ^[4] against the euro this month.  Gains in the dollar's momentum have a souring affect on investors' tastes for precious metals like silver and gold.

"However," says Gold and Silver Investments Limited director, Mark O'Byrne ^[5], "it is important to realize that the dollar's strength [is] more a function of concerns regarding the U.K., euro-zone and global economy rather than any particular sudden confidence in the U.S. economy and the U.S. dollar."

The U.S. Labor Department ^[5] reported that consumer prices rose 0.8% in July, the fastest rise in 17 years, with the biggest increases in costs of energy, food, clothing and cigarettes. The core consumer price index, which doesn't account for food and energy prices, rose 0.3% for a second month in a row. The four-week average of new jobless claims rose to its highest peak since April 2002, up 19,500 to 440,500. 

These numbers ought to prove positive for precious metals as safe-haven investments; however, "some investors are viewing these figures as a signal that the Fed will not lower rates in the near term, even with a slowing economy," said David Beahm ^[5], a vice president at precious metals retailer Blanchard & Co.

Growth in the dollar and an ease up on inflation worries undoubtedly place downward pressure on the price of gold and silver. And clearly they have. However, silver seems to have come out the bigger loser compared to gold in this week's harsh slides and has plummeted 17% ^[6] this month. The reason, say some analysts, is silver has much wider industrial applications than gold and reacts much more strongly than its yellow cousin to market concerns over how much global slowdowns may hurt the demand for raw materials.

"Demand is a key driver here," said Daniel Brebner ^[7], global head of commodities at UBS Financial Services. "The key concerns are over Western economies, perhaps more importantly emerging economies and predominantly China — where growth has been slowing."

How much more will silver drop? Hard to say. "Near-term support should be around $US12.38 then $US12.00s," said Adrian Kon ^[8], analyst at Phillip Futures in Singapore. "On a more bearish note, we could in fact head all the way down to $US11.50s because the long-term uptrend seems to be breached as of today's sharp downward movement."

But some analysts think the sharp decline is merely a correction and that demand outlook is still strong. These die hard bulls are not ready to give up on silver quite yet and see this latest drop as a buying opportunity.

"Market panics are a harvest time for seasoned speculators," says Clive Maund. "Despite the savage losses that have just occurred, the long-term uptrend in the index remains unbroken and with it now approaching its long-term uptrend line, underpinned by the strong support level shown, and incredibly oversold, we are very close to or at a major buy spot." As we approach the end of the summer doldrums and the beginning of the fall upward trend, it will be interesting to see how well such a move might pay off.