3. Silver demand increase

What's more, a shift in who owns silver has contributed to a bottleneck. Stockpiles of silver were for decades largely part of Commodity Exchange warehouse inventories. COMEX inventories were mostly commercial holdings, with a small portion being held for investment purposes--peaking at around 280 million ounces in the early 1990s, according to a report by Ted Butler.

Then a funny thing happened--after the introduction of silver Exchange-Traded Funds, there was a profound shift in the location and structure of world visible silver inventories. Rather than being a commercial stockpile, investment holdings have overshadowed conventional-use silver by 4 to 1.

Given the long-term nature of ETF investment holdings and the current silver boom, it's highly unlikely this new floor for silver prices will go anywhere. That skews the chart upward for silver.

4. Silver is useful

Not to get all scientific on you, but silver is an amazing element. The substance has the highest electrical conductivity of all metals, even copper. That means it's useful in electronics, from high-end speaker wire to computer keyboards to circuit boards. Silver oxide and silver-zinc batteries are also used in many applications due to their long life and impressive energy-to-weight ratio. In short, you can use silver--and while gold is also highly conductive and used in a limited manner in industrial and electronic applications, it is cost-prohibitive and in many ways inferior to the conductivity silver provides.

About 700 million ounces of silver are mined each year, and Silver Insights figures about 75% of that metal is going to industrial and commercial use--including 15% to photography alone. Another 20% goes to jewelry and other goods like silverware. That leaves a mere 5% for coinage, investing and "speculation." This built-in demand by consumers and businesses provides silver a much stronger floor than gold in the opinion of many commodity investors.

5. Silver's behavior in the last boom

The last time silver went parabolic was in the inflationary environment of 1979-1980. In the first nine months of 1979, inflation surged to an annualized rate of more than 10%, thanks to skyrocketing prices of commodities such as oil. Silver and gold went on a tear as a result.

If you believe that inflation is in the works again due to a weak dollar, runaway federal deficits and other macroeconomic factors--a common mindset right now--then check out the peak prices and valuation of silver versus gold during the last boom:

If you believe the headline dollar amount of the peak, you'll see silver has some significant room to run above the low $30s. Secondly, if you buy into the valuations versus gold then silver has ground to make up even if gold flatlines. Specifically, to achieve a 37-to-1 ratio with gold at current prices, silver would be priced at $37.50 or so--a 22% upside.

Of course, one person's boom is another's bubble so even if those prices are achieved you have to know when to say when and bail out at the top. Also, there's the fact that the Hunt brothers tried unsuccessfully to corner the silver market 30 years ago and helped make silver's surge even more obscene.

Still, the numbers show silver isn't yet near its historic ceiling when it comes to raw prices or valuation versus gold. And by the way, these are raw numbers that aren't adjusted for inflation. Based on that, silver's peak was actually around $130 an ounce in today's dollars.

6. How To Invest In Silver

You can buy physical silver coins, of course, but as mentioned earlier, the affordability of silver means you need a sizeable space to store a sizeable investment.

Alternatives include physical silver ETFs that track the metal very closely, including the iShares Silver Trust ETF (SLV) and the ETFS Physical Silver Shares ETF (SIVR) .

For the aggressive silver buyer, there is a 2x leveraged ETF, the ProShares Ultra Silver ETF (AGQ) that looks to generate twice the returns (or losses) of silver prices.

Then there are the silver miners, including pure plays such as Silvercorp Metals Inc. (SVM) and Pan American Silver Corp. (PAAS) and the Global X Silver Miners ETF (SIL). There are also diversified miners involved in silver and other metals including gold and copper, such as Hecla Mining Co. (HL) and Coeur D'Alene Mines Corp. (CDE).

(Jeff Reeves is a freelancer for MarketWatch. He can be reached at 415-439-6400 or via email at AskNewswires@dowjones.com)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=SC9L1AsZfjSOMXm8nQLpNA%3D%3D. You can use this link on the day this article is published and the following day.

Dow Jones Newswires

January 14, 2011 08:07 ET (13:07 GMT)

Copyright (c) 2011 Dow Jones & Company, Inc.- - 08 07 AM EST 01-14-11

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