The Globe and Mail

A few weeks ago in this space, I wrote about silver – specifically, about UBS strategist Mark Bulsing’s assertion that silver prices are over-hyped and hard to justify, given that the precious metal is very different from its more illustrious cousin, gold.

Well, as many readers were quick to let me know, not everyone agrees with Mr. Bulsing’s analysis. So, I thought, in the interest of fair play and healthy debate, why not take a look at the other side of the silver argument?

As fate would have it, the other side of the argument landed on my desk this week. Brockhouse Cooper strategist Pierre Lapointe published a report arguing that to him, silver looks like a stronger investment than gold right now.

But it gets better. Some of the factors that Mr. Bulsing highlighted in dismissing silver? Mr. Lapointe insists those are actually compelling reasons to buy it.

Not like gold – and that’s a good thing

In a nutshell, Mr. Bulsing argued that gold trades as a form of currency, and is increasingly an investing vehicle. Silver, on the other hand, is essentially an industrial metal, and should trade on supply/demand fundamentals. And, he said, those supply/demand fundamentals aren’t favourable – silver production (both newly mined and recycled scrap) exceeds annual consumption.

But Mr. Lapointe noted that precisely because of silver’s industrial nature, it typically outperforms gold in times of economic recovery – it responds to the increased demand that an economic expansion implies. From this perspective, silver’s rise over the past three months (up more than 50 per cent) compared with gold (despite all the hype, it’s up a much more modest 17 per cent), far from being a market misstep, could merely be silver’s typical post-recession surge over gold.

Further, he points out that gold’s much greater exposure to so-called “financial demand” – purchases by investors – leaves it much more exposed than silver to the changing moods of the market.

“Financial demand for precious metals (especially coming from ETFs) has played an important role in the increased overall interest for these commodities, but it can be quite fickle. At this point, there is a risk that this financial demand could dry up in the future,” he wrote.

“We feel more comfortable with the metal that has the strongest fundamental demand.”

Readers weigh in

One reader made another good point about silver’s relatively thin financial demand. He said that if investors haven’t yet discovered silver to the same extent they have gold, wouldn’t that be an argument that silver demand from this segment of its market has much more room to grow – and, thus, be a bullish argument for silver?

But another reader raised a warning about physical demand for silver that’s worth keeping in mind: A big chunk of silver’s market in previous economic cycles has all but disappeared as we enter this new cycle. As this reader (and Mr. Bulsing’s report) pointed out, consumption of silver for photographic processing, thanks to the emergence of digital technologies, has fallen from more than 25 per cent of total consumption in 2000 to less than 10 per cent today – and that demand is never, ever, coming back.