Precious metals and commodities have been all the rage lately, with talks about a reflation play being a staple to every portfolio. But with all the talks about gold and oil being a safeguard against government spending destroying the value of the dollar, it is a wonder that silver has remained hidden for so long.

Many of the sharpest minds in the investment world have retained their bullish sentiment on precious metals, including well-known names like Marc Faber and George Soros. While the recent Wells Fargo announcement surprised all of Wall Street and gave glimmers of hope on the global economy, the fact of the matter is that nothing has fundamentally changed with the global financial system and the same systemic risks plaguing analysts before remain today.

It is all but an accepted fact governments worldwide are willing to sacrifice the threat of inflation in order to stimulate economies and boost employment rates. With both gold and silver, demand has been constantly in flux depending on the current prevailing sentiment of risk aversion/appetite. But what makes silver look far more attractive as a store of wealth and a medium of diversification are the fundamental factors solely affecting silver. With all precious, risk aversion sentiment is a huge factor in driving up demand, but silver has seen a significant decrease in inventories and supply pressures. COMEX Dealers Silver Inventory has fallen sharply from nearly 80 million registered ounces at the end of November 2008 to around 70 million at the end of March.

Part of the factors attributed to the supply contraction can be pointed to its production. Silver is mined as a byproduct of base metals such as copper, lead, and zinc. As the industrial production continues to suffer, demand for base metals drop and therefore miners are less willing to mine base metals. Ironically enough, silver and gold demand at these moments increase as investors look to diversify their portfolios and hedge against suffering currencies.

While we have seen that price increase in all precious metals, gold is trading at 70 times the price of silver whereas it has historically traded around a ratio of 30 to 100 over the past three decades. Yet, what is unknown to most is that while gold is priced at 70 times silver, worldwide silver supply is only five times lesser than the supply of gold.

Unlike gold, which is held in significant amounts by governments worldwide, governments hold a tenth of their gold in silver, making a sudden and big sale of silver highly unlikely. In fact, including governments and all other major players, Warren Buffet is one of the bigger holders of silver.

Also a supply/demand factor involving silver is that unlike gold, which is seen as solely a store of value, silver has a large variety of industrial applications that make it indispensible. In fact, over the long term, while the physical stock of gold circulating only increases, silver has a consumption aspect of demand that over time decreases the physical stock of circulating silver. Industrial silver applications include heat and electrical conduction, light reflection, lubricant, alloy, and in fact several biomedical uses as well. Another driver is that future industrial consumption outlook is very positive in that all the new technologies, including solar, battery, laser, and water purification require silver.

With all these factors in line, it is no wonder where there are rumors circulating silver analysts of price manipulation within the silver market. In fact, silver analyst Ted Butler accused giant financial institutions and singled out JP Morgan as the leader of downward price manipulation of silver. While this worked out fine when supplies of silver were still relatively large, the dwindling silver inventories have made price manipulation a huge area of concern and should the price of silver be artificially deflated, there will be a huge upward spike in the price of silver to the market equilibrium.

Regardless of the rumors surrounding silver, one thing is for certain, and that is unlike gold with constantly growing amounts in circulation, physical amounts of silver are limited and inventories are dwindling. With that in mind, any economist can tell you that silver supply must increase (driving up the price of production and therefore price of silver) or demand must decrease, which does not seem likely given the large variety of uses of silver, industrial and financial.

-Robert Sun

Disclosure: At the time of writing, the author holds no positions in any precious metals.

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