'Why is silver so weak compared to gold in the current precious metals boom?' an American friend asked me recently.
The question was based on a misconception. My friend was measuring current prices, which hit a high of $21.34 an ounce on March 17, against the $50 of 28 years ago. But the circumstances back then were extraordinary.
If you look at annual average prices over the past five years, silver has in fact outpaced its rivals, rising 191% compared to platinum's 142% and gold's 124%.
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However, both silver and gold have lagged in the latest boom relative to platinum, whose average price over the past 12 months has been 33% higher, compared to 26% for gold and 20% for silver.
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The main reason for platinum's outperformance, of course, is the fall in supply of newly-mined metal from South Africa, due to mining problems there power cuts and safety issues which are expected to persist for several years.
Platinum is unusual in that supply of new metal is so concentrated in one country. Last year South Africa accounted for 77%. In silver the largest single supplier is Peru (17%), while in gold the figure for the biggest, China, is only 11%.
Although the prices of all three of the major precious metals do move together in the same direction, their rates of change differ because of individual supply/demand characteristics.
Supply of newly-mined silver and platinum has shown strong growth over the past five years, but gold production has actually fallen by 5%.
The difference probably reflects strong growth in demand for industrial metals. Three-fifths of newly-mined silver is the by-product of mining base metals, especially copper, zinc and lead. Platinum is an industrial metal in its own right, with strong growth in demand for catalytic converters, electronics and oil refining.
Silver demand has managed to grow despite the big decline in its use in photographic film with the spread of digital technology. This is because of strong growth in consumption by other industries, especially electronics.
Whereas gold is heavily dependent on use in jewellery manufacture accounting for 61% of world demand last year silver's dependence is much less, at 18% in 2007.
Jewellery is a price-sensitive sector. Very high and still-rising prices have depressed consumer demand for jewellery, but less so for silver than for platinum or gold. Being relatively much cheaper silver is currently trading at around $18 an ounce, compared to $930 for gold and $2,180 for platinum it has benefited from demand as a cheap substitute, both directly and as a component of the alloy white gold.
Although investment demand is much less important for silver than for gold, consultants GFMS say in the World Silver Survey 2008 that "investment's impact on the market and prices tends to be much greater" than its share of total demand 5% last year would suggest.
The arrival of exchange traded certificates, which offer ownership of physical metal without any need to store or insure the bullion, has been particularly beneficial for investment in silver, as the metal is 50 times bulkier than gold to handle and store.
By the end of 2007 silver owned through ETFs was equivalent to almost one-fifth of annual demand. In the first quarter of this year another 1,000 tons were added to ETF holdings.
Is there a place for silver in your portfolio?
Each of the precious metals has its particular advantages.
Platinum is by far the rarest and most underinvested, as well as having the most powerful industrial demand driver in anti-pollution and fuel processing. Palladium is a cheaper alternative.
Gold has the pre-eminent role as an investment asset because of its universal familiarity, long history as a store of value, and broad markets.
But silver is also widely accepted as an investment asset, and now thanks to ETFs is just as easy to invest in as gold, and tends to rise more strongly than the yellow metal in a boom market.
The best compromise for individual investors might be the ETFs listed in London offering holdings in a basket of precious metals. ETFS Physical PPSG Basket (PHPM), for example, is currently 43% gold, 25% silver, 20% platinum and 12% palladium.
By Martin Spring in On Target, a private newsletter on global strategy
