Taking Stock: Middle East boost for silver

By SIMON WATKINS FOR THE MAIL ON SUNDAY
Updated: 06:26 EDT, 20 February 2011

As the situation in Bahrain and other Middle Eastern states became increasingly unstable last week, all eyes turned to gold and oil.

Middle East: Protests have spread across the region

One famous as a safe haven in a time of crisis, the other an obvious indicator of risk in oil-producing regions.

Unsurprisingly, the price of both rose last week, that of oil casting a worrying shadow of even higher energy costs across the global economy.

But less well noticed outside the markets was the soaring value of another precious metal - silver. The price has been climbing for much of the past 12 months, but on Friday it hit its highest price for almost 30 years.

In the London stock market the boom helped drive up shares in London's two biggest silver mining groups. Hochschild went up almost six% on Friday to 562.5p while Fresnillo was ahead more than two%.

The spot price of silver closed on Friday at $32.45 (£20) an ounce, up more than 8% on the week and double its price this time last year.

It was also the highest level since April 1980. That peak happened to coincide with the Eighties peak in oil prices, fuelled significantly by the Iranian revolution of 1979.

Like gold - also up last week but still off its recent peak - silver is being sought as a safe haven by investors. According to analysts, investors in search of safety turn first to gold and only later to silver, meaning the white metal often plays catch-up, hitting its peaks later.

Analysts at Danish investment bank Saxo said silver had outperformed gold by 12% since the unrest in North Africa first raised the prospect of serious instability in the wider region. They also reported a significant demand for silver coins.

But as well as investors seeking security, there are some more fundamental reasons for silver's gains over the long term. Unlike gold, which has relatively few industrial uses, silver and its many compounds have a wide range of industrial uses, from mirrors and musical instruments to electronics and developing photographs, though this has declined significantly since the boom in digital cameras.

Still, that effect has been offset by the familiar story of growing demand for other industrial uses from the emerging manufacturing markets such as China.

Swiss bank UBS raised its near-term target price for silver to $35, which given the momentum that has developed seems entirely likely. But whether it will rise significantly further is, of course, unknowable.

As with gold and oil, the answer will depend significantly on events in Bahrain and elsewhere in the coming weeks.