It's Not Just Investor Demand Pushing Silver Prices Higher

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You've heard that silver prices are expected to increase amid growing demand for the precious metal, as investors worried about central bank and government spending policies seek alternatives to stocks.

Money Morning Global Resources Specialist Peter Krauth said in his 2013 silver price forecast that the white metal, which closed at nearly $33 an ounce Wednesday, could hit $54 an ounce next year.

In fact, Krauth said he likes to think of silver as "gold on steroids."

But investors have largely overlooked another key factor that will contribute to higher silver prices over the next couple of years.

That's global industrial demand for silver, which will start to take off in 2013.

Study Details Industrial Demand for Silver

A new study by Thomson Reuters GFMS for the Silver Institute found the industrial sector plays an increasingly important role in silver consumption, offsetting the declining use of the metal in photography and silverware.

The study supported what the CEO of Hecla Mining (NYSE: HL), Phil Baker, said in September. Baker compared industrial demand for silver today to that of about a century ago, when the photography industry drove much of the demand.

Today, Baker says, a myriad of industries are finding uses for silver. All these industries – from electronics to medicine – are taking advantage of silver's unique physical properties such as electrical conductivity.

A slow global economy in 2012 and perhaps early next year will mean for a few more months we'll see minor growth for industrial demand for silver. But the GFMS study forecasts increased industrial demand for silver later in 2013 and in 2014, when the study predicted industrial demand would reach a record 511.6 million ounces, about 57% of expected total silver fabrication that year.

Rising industrial demand is expected to be fueled in part by growth in the automotive sector and a recovery in the housing and construction industries. Silver is used in fancy electronic gadgets found in many vehicles today, as well as in lighting and tools used in construction.

Another factor cited in the forecast is demand for ethylene oxide. This chemical intermediary is produced by direct oxidation of ethylene in the presence of a silver oxide catalyst. It is critical in the production of many products, including detergents, plastics, solvents, thickeners and a number of organic chemicals.

In the past 10 years, the study found, the most notable change in industrial demand for silver came from emerging economies.

That should come as no surprise to most investors.

The largest end users in emerging markets are in the electronics sector, the GFMS study said.

It stated "rapid advances in living standards [in emerging markets] mean such [electronic] products have become increasingly more affordable as well as desirable."

Of special note in the report is China. The country accounted for a mere 8% of global silver industrial demand in 2000. But by 2011, demand from China had grown to 18% of global industrial demand.

That trend, while slowing this year, is expected to continue in the years ahead. In absolute terms, GFMS predicts China will achieve successive record highs from 2012 – 2014 in terms of its industrial usage of silver.

Cashing in on Higher Silver Prices

To tap into the expected increase in silver prices, investors are buying not only silver coins and bullion but also investment products.

These products include the likes of the Sprott Physical Silver Trust ETV (NYSE: PSLV), which allows investors to actually redeem the units of PSLV in exchange for physical bullion.

Investors also might want to consider the ETFS Silver Trust (NYSE: SIVR) to try to cash in on rising silver prices.

For a detailed look at how to profit from higher silver prices, .

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