The average price for silver reached a record high of $35.12 (U.S.) an ounce last year, but this may be about as good as it gets for gold's low-budget cousin.
Some market watchers are warning that silver faces a vicious bear market that could eventually take the price to the mid-teens, a scary comedown for current investors, considering silver has been changing hands around the $29 level.
The bears are still a minority. But they worry that silver's price surge is prompting growing mine output at a time of sputtering industrial demand. Investors have to sop up the resulting surplus of metal, otherwise prices have nowhere to go but down, they contend.
Silver prices have gotten so high miners are "digging holes wherever you can find," says Ned Schmidt, publisher of the Value View Gold Report, a precious metals newsletter. Mr. Schmidt says he wouldn't be surprised to see silver fall to a low of $16 an ounce later this year.
"Silver has got a cloudy lining," says Jon Nadler, senior metals analyst at Kitco Metals, who shares a negative outlook for the metal.
To be sure, not everyone holds a downbeat view. Some big-name Canadian investors, such as precious metals maven Eric Sprott, chief investment officer of Sprott Asset Management, have publicly said they believe silver is poised for a big rally.
But Mr. Schmidt says the problem with the bullish case for silver, at least over the near term, is the threat of growing supplies.
A key industry figure highlights the problem. According to the trade association the Silver Institute, the average cash costs at silver mines, covering items such as blasting the ore and hauling it out of the ground, worked out to a mere $5.27 an ounce in 2010, less than one-fifth of current market prices.
Even including other outlays, such as head-office expenses and the depreciation of mining equipment, companies are still coining money at current prices. Meanwhile, supplies of silver scrap from recycling and other sources, such as the melting of old silver tea sets and coins, are also surging in response to the high prices.
Silver is "a commodity. We can't forget that. In a lot of ways it's no different than wheat or corn or soybeans. You raise the price high enough, people will produce it," Mr. Schmidt says.
At the same time, industrial demand is running up against the problem of a slowing economy, compounding the long-term downtrend in usage from photography and silverware. One bright spot has been the increasing use in solar panels, but even that industry is starting to slump.
Despite the weak industrial fundamentals, silver prices have managed to stay aloft because of a huge rise in investment demand from speculators, hedge funds, and metal buying-ETFs seeking a low-cost alternative to gold . A report released by the Silver Institute late last year estimated investment demand reached $10-billion in 2011, up from less than $1-billion as recently as 2007.
Mr. Nadler says silver prices are vulnerable because these hot money inflows from speculators could reverse, while supply is rising due to silver's low cost of production. Even though prices have fallen substantially from the closing high of $48.44 an ounce reached last year in late April, investor psychology still remains too optimistic for current prices to be a market bottom, he said.
The fundamentals are "as doomy and gloomy as possible, but capitulation I don't think has happened. All you see is the bulls in denial," he said.
Mr. Sprott, for his part, said in remarks published earlier this year that gold will reach new record highs, but silver is an even better place to park money because it will have bigger percentage gains.
David Franklin, an analyst at the firm, contends that silver remains undervalued. It's one of the only commodities that hasn't moved beyond its record high of nearly $50, reached briefly in January, 1980. He said silver's price would have to reach around $120 an ounce to match the 1980 figure in inflation-adjusted terms.