Without the glitter, but still attractive

For the past few weeks, young men and women have been hurling themselves down mountainsides on skis, sledges and boards in the name of sporting glory. The Vancouver Winter Olympics has had its fair share of tragedy, controversy and bad (ie good) weather but the Games has also produced some great sporting moments and the best athletes have, of course, been rewarded with gold medals.

Except that gold medals aren't actually gold. They are coated in gold but the medals are predominately made from silver – 92.5 per cent silver to be precise. For an athlete that has risked his or her life to reach the top of the podium, this might seem like being short changed but I suppose medals are given for their symbolical value rather actual value.

Despite silver's furtive attempt to reach the top of the medal rostrum, it has traditionally been seen as gold's poor relation. Silver is found in greater quantities in the earth and is, therefore, less valuable than gold, which makes it less attractive for those wanting to show off their expensive jewellery. The difference in price is telling: $16 an ounce for silver versus over $1,000 an ounce for gold.

Where silver does have the edge is in industrial applications and it has been an important component in photography, mirrors and electronics for years. However, because silver lacks gold's status as a de facto reserve currency it is more susceptible to the macroeconomic conditions that move commodity prices. The price of silver hit a peak of $20.92 an ounce in March 2008 when it appeared that rising demand for commodities could never be interrupted. When reality intervened, the price of silver promptly collapsed to just $8.88 within seven months.

Silver, therefore, behaves more like copper than gold. Its price is determined by market fundamentals, while gold has an almost mythical value – particularly for investors who buy it as a hedge against collapsing banks, currencies and stocks. As with other commodities, silver staged a recovery last year but the gap between the gold and silver price has remained at a historically wide ratio. That ratio is now 68:1 compared to the long-term trend of about 62:1. To close the gap, demand for silver needs to rise and there are indications that this may be happening.

Not too long ago, the concern was a contraction in demand for silver as one of its largest industrial uses – making photographic film and paper – virtually disappeared with the introduction of digital cameras. Despite that, demand for silver has remained pretty stable at about 900 million ounces a year as other industrial applications have replaced and overtaken that photographic demand.

This is particularly true in medicine where silver is increasingly used as a component in hospital equipment. This is nothing new – water used to be kept in silver jugs on long sea journeys to keep it fresh – but silver's anti-bacterial properties are becoming particularly sought after to fight the new generation of superbugs that are resistant to antibiotics. Silver's traditional use in mirrors has also found a new outlet in solar cells as the metal is used to concentrate the sun's rays to store as energy.

Silver has also benefited from the renewed perception of precious metals as an investment opportunity. Gold has dominated this trend but silver has been able to ride on its coattails, although the comparatively low value of silver compared to gold means that it is expensive and inconvenient to store large quantities of metal.

However, the emergence of exchange-traded funds for silver has allowed investors to buy shares in physical bullion without the expense of finding their own vault. As a result, investment demand for silver shot up from five per cent of production in 2008 to 15 per cent last year.

Silver has become particularly popular with professional investors (gamblers as they are also known) because the market for the metal is quite small, illiquid and therefore volatile. Big movements in price are possible without too much effort, which is something speculators are always happy to take advantage of.

While silver is unlikely to trump gold as the most important or valuable precious metal, neither can it be written off as merely a second-rate commodity. Silver's price may fluctuate with the industrial cycles in a way that gold does not, but its unique properties mean that it will always be "precious" compared to mundane metals like copper and iron. As any Olympian would no doubt agree, silver still has its attractions.

- The author is business correspondent of The Times of London

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