LONDON Silver bulls may be hoping that the metal's healthy first-quarter price rise is the first step back towards record highs. Not so fast.
Its advocates say silver, which occupies a middle ground between industrial metals like copper and investment vehicles like gold, can benefit both from the fledgling economic recovery that is lifting copper and from the investment that is driving gold.
But record-high mine supply and questions over demand have left a long shadow over silver's underlying fundamentals, while huge price volatility last year, when the metal crashed 35 percent in a matter of days on two occasions, has undermined its appeal to investors as a cheaper alternative to gold.
The broad investment environment is also bleaker than it was last year for friends of silver.
"There are two issues that in the short term suggest we are not going to head back towards $50," Mitsui Precious Metals strategist David Jollie said. "One is that margins on Comex are still higher than they were last year, so investors are going to have to come back in more weight to drive the price further."
He added, "At the same time, silver turnover on the Shanghai Gold Exchange is relatively low compared to where it was last year.
"Silver's volatility is probably going to provide an opportunity for investors to push it higher, if they want to. But they are going to have to put in considerably more effort to reach the same levels as last year," he said.
Silver hit a record near $50 an ounce a year ago on the back of rallying gold prices, after precious metals became increasingly in demand as policymakers and markets struggled to recover from the financial crisis.
A recovery in gold prices this year after late 2011's washout and decent seasonal coin-buying in January have helped silver to outperform other precious metals.
But gold itself is looking like less of a safe bet than it once was. As expectations for a fresh round of quantitative easing have receded, prices have surrendered gains and are now little better than flat on the year.
As a smaller and less liquid market than gold, silver tends to outperform when precious metals prices are rising, but underperform when they fall. Slackening appetite from investors would seriously undermine silver.
"The dislocation in the valuation between the very sharply rising gold price and silver, which underperformed for 10 years, was so large that the investment community jumped on the bandwagon and drove its price high within a year," Angelos Damaskos, chief executive of Sector Investment Managers, said.
"Now we are back to the normal situation, where silver behaves much more like industrial metal. Investors are no longer looking at it as a safe-haven asset," he said. "It will probably underperform for a good few years."
From a fundamental point of view, silver's foundations are looking increasingly shaky. Photography off-take, which accounted for 213.1 million ounces of annual demand in 2001, slumped to 72.7 million ounces by 2010.
Newer drivers of industrial demand such as solar cell manufacturing are also losing buoyancy. In Europe, historically the largest photovoltaic market, subsidy cutbacks from cash-strapped governments are likely to cut the pace of solar growth.
And questions over the role of China, the largest consumer of many key commodities, are increasing.
"One of the drivers last year was private investor buying of silver in China," Citigroup analyst David Wilson said. "Once they got their fingers burnt, they haven't been back."
On the supply side, miners are expected to have produced another record amount of silver in 2011, with metals consultancy GFMS forecasting a 31 million ounce rise in output last year.
There is undoubtedly some good news for silver. Confidence in the U.S. recovery remains fragile, and any fresh signs of a downturn could fuel speculation of further quantitative easing, lifting gold and consequently silver.
A cyclical increase in electronics manufacturing activity in the United States and China would lift industrial demand for the precious metal, and the photovoltaic industry is likely to grow in emerging markets.
But overall, the picture for silver is darker this year than it was 12 months ago, and other metals have greater appeal. While prices may rise again, peaks are likely to be lower and shorter-lived than 2011's highs.
"On a day-to-day basis, silver may rise more than gold," London & Capital's chief investment officer, Pau Morilla Giner, said.
"But overall gold gives you a better balance between the need to protect yourself against the possibility of further monetary easing and rising risk in Europe, and the ability to not fall nearly as much as silver can fall, and has fallen," he added.
"At this juncture, gold is probably a better place to be than silver."
(Additional reporting by Ikuko Kurahone; Editing by Veronica Brown and Jane Baird)