Renewed investor affection for the precious metal in the past few months is in sharp contrast to investor interest in silver over the last year and a half. Many precious metals investors had largely stayed away from silver in that time frame after some had got caught up in its volatility. Silver had touched a 30-year high in April 2011 before plunging 35% in just a few short weeks.
Silver has climbed 35% from its June low just above the $26 an ounce level. This performance made it the top performing star in the commodity universe for the third quarter, with hints of more fireworks to come.
Now it looks as though silver prices will tear into the $40-plus range, nearing $50 an ounce before 2013.
Money Morning Global Resources Specialist Peter Krauth predicts silver prices will reach $48 - $49 by year's end, and hit "north of $60" by spring.
That's why he refers to the white metal as "gold on steroids."
Part of the answer to why silver has done so well recently is the launching of QE3 by the U.S. Federal Reserve. Silver rose 53% from December 2008 through March 2010 after QE1. It climbed 24% after QE2 in the period ending in June 2011. Now we have QE3.....
As Michael Cuggino, who manages about $17 billion at Pacific Heights Asset Management, told Bloomberg News, "In this accommodative monetary policy scenario, silver seems to be trading as an alternative currency."
But the real reason behind the rise in the price of silver goes deeper than just QE3 - or, as some in the market jokingly call it, QE Infinity.
Here are some of the other reasons the price of silver is headed to $50 by 2013.
What's Behind the Silver Prices Climb
Much of the sharp rally in silver was fueled largely by short-covering.
That is, some investors had made rather large bets that silver would continue falling and were caught off-guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short-covering since May 2011.
At the same time. Bloomberg reported that hedge funds were the least bullish on silver in almost four years. But that has changed, and quickly.
Bloomberg now reports hedge funds are the most bullish on silver that they have been in seven months. That is a flip-flop that may scare off some contrarian investors for the short term.
There has also been renewed silver buying from individual investors recently. According to the consultancy GFMS, sales of American Eagle silver coins rebounded strongly in the third quarter as did buying in silver ETFs. Holdings of silver in ETFs rose by nearly 600 tons in the past two months alone.
Thanks to this reinvigorated investor interest in silver, GFMS is forecasting that silver prices breach the $40 threshold before the end of 2012. Although GFMS does warn about the volatility normally associated with silver.
Others, such as Sprott Asset Management's John Embry, are even more bullish.
Embry said in a press release, "When silver breaks free, I think many people are going to be shocked by how fast and far it goes."
The head of the firm, Eric Sprott, is on record saying we will see triple-digit prices for silver within the next several years.
That may be optimistic, but individuals thinking of betting on the price of silver should keep one fact in mind: Silver is the only major commodity not to have reached a new all-time high in the decade-long commodity bull market.
Also, silver is still cheaper than it was 32 years ago. So the potential for large gains is there.
For non-futures investors looking to participate in the silver market, the most convenient way of doing so is through the use of exchange-traded funds (ETFs).
The most liquid ETFs that track silver prices directly are the iShares Silver Trust (NYSE Arca: SLV) and the ETFS Physical Silver Shares (NYSE Arca: SIVR).
For a leveraged play on the price of silver, investors can consider silver-mining stocks. A fast and easy way of owning a portfolio of them is through another ETF, the Global X Silver Miners (NYSE Arca: SIL).
Just remember that while the long-term outlook on the price of silver is bullish, it's still one of the most volatile metals of all commodities. Buy on pullbacks and don't sweat the short-term dips.