BUY OR SELL-Is silver sustainable at $30 an ounce?
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* Silver above $30 for first time since 1980
* Gold/silver ratio falls below 48, silver seen overvalued
* $100 silver investment on Jan. 1 would be worth $180 now
By Frank Tang
NEW YORK, Dec 6 (Reuters) - As silver climbed above $30 an ounce on Monday for the first time since 1980, traders and analysts were cautiously bullish about the metal's ability to keep outperforming gold and stay at 30-year highs.
Momentum traders and retail investors have been piling into the white metal this year, which has risen with gold as a safe haven amid a eurozone debt crisis and the prospect of further monetary easing by the Federal Reserve and central banks.
Silver is also becoming a favorite play for investors betting on a swift economic recovery and greater demand for industrial commodities. Traditionally, about half of the world's silver production is consumed by manufacturers and other industrial users.
While gold has grabbed investors' attention this year with its rally to record highs at almost $1,430 an ounce, silver has quietly outpaced those gains on a percentage basis. A $100 investment in silver on Jan. 1 would now be worth about $180 versus $130 for a similar investment in gold.
Graphic silver vs gold: link.reuters.com/fyz68q
Graphic gold-silver ratio: link.reuters.com/vab78q
The rally in silver -- up nearly 80 percent this year versus gold's 30 percent gain -- has narrowed the gold-to-silver ratio to less than 48, its lowest level since the first quarter of 2007 and a point at which more analysts were beginning to call silver overvalued.
At over $30 an ounce, silver is at its highest level since 1980 when a physical squeeze briefly sent it above $50 an ounce in the Hunt Brothers' infamous attempt to corner the market. The Hunts were later convicted of conspiring to manipulate silver prices.
Is the traditionally volatile and speculative silver sustainable at 30-year highs?
Frank McGhee, head precious metals trader at Chicago-based Integrated Brokerage Services LLC, said silver prices are going to stay at high levels and prices could rise as high as $35 an ounce.
"The market is extremely well bid. The funds are obviously adding the support underneath the market, but the continued Chinese expansion and virtually what would have been considered run-away inflation in the U.S., if those (China) numbers were occurring here, are continuing to drive consumption.
"You've got dwindling above-ground stocks, you've got tremendous interest in the market, you've got the Fed now talking about QE3 ... all of that has silver still attempting to get back to the equivalent level as it should have been with gold at $1,400 an ounce," he said.
Physical silver held by the world's largest silver-backed exchange-traded fund, iShares Silver Trust (SLV), held near an all-time high of 10,893.68 tonnes set on Nov. 23.
The U.S. Mint's American Eagle silver coins sales rose to a record above 4 million ounces in November, as economic uncertainty prompted individual investors to bet on silver and gold as safe havens. [ID:nN30490406]
"We're looking at silver moving into a deficit position next year, mainly because we continue to see the global recovery continuing and that means the industrial part for silver will grow," said Bart Melek, global commodity strategist at BMO Nesbitt Burns in Toronto.
In November, respected precious metals research and consulting firm GFMS said silver is likely to rise above $30 an ounce in 2011, lifted by strong investment buying and recovering fabrication demand.
For 2010, silver fabrication demand is expected to rise 10 percent as a recovery in industrial uses, record coin demand and slight growth in jewelry off-take offset losses in photography and silverware fabrication. [ID:nWALHME6SC]
"There're a few factors -- strong industrial demand, and mine production is not exactly setting the world on fire. Most silver is mined as a by-product of copper/zinc/lead mine production. Copper production has been disappointing, so perhaps that has affected silver output too," said David Thurtell, an analyst at Citigroup in London.
Other analysts said there are few fundamental reasons to support silver's sharp rally, and the speculative commodity could sell off quickly similar to its previous rallies.
"I am not sure what has moved this market to this 30-year high. To the best of my recollection, the use of silver has diminished over the years for different products such as photography and in the X-ray field," said George Nickas, a broker of FC Stone in New York.
"I don't know if it's (related to) the inquiry by the CFTC on the short positions of the two major banks that it has been studying over the last two years," he said.
Late in October, JPMorgan Chase & Co (JPM.N) and HSBC Holdings Plc HSBC.L were hit by two complaints from traders accusing the banks of conspiring to drive down silver prices. They claimed that the firms reaped up to hundreds of millions of dollars of illegal profits. [ID:nN27259071]
Some precious metals advocacy groups claimed that governments, central banks and commercial banks have colluded to keep the price of silver weak. However, conventional investors view that as a conspiracy theory with very little evidence to back up the claim.
"These metals are getting overbought, but they seem to be in their own upside world. The fact that Bernanke said the economy may need more stimulus, and with the European debt crisis and concern about European currencies, people are buying precious metals as an alternative to currencies," said Donald Selkin, chief market strategist of National Securities Corp in New York.
"Rightly or wrongly, there is very good strength there. A lot of hedge funds have big positions in these metals, and their price has become a function of investment demand rather than demand for their usage. They've become investment vehicles with the ETFs and other investment vehicles. But, to me, it seems like a very crowded trade," he said. (Additional reporting by Jan Harvey in London, Christopher Kelly and Carole Vaporean in New York; editing by Jim Marshall)