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MONDAY, SEPTEMBER 24, 2007

COMMODITIES CORNER





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Silver's Cloudy Lining
By TERRY WOOTEN

LIKE JANUS, THE TWO-FACED Roman god, silver has its own double visage.

It's classified as a precious metal but has many industrial applications, so it can act like a base metal; therein lies the white metal's sometimes schizophrenic price behavior. Silver benefited from this dual purpose last week following the Federal Reserve's aggressive interest-rate cut Tuesday, rallying more than gold in the days after the move. Silver rose both because the cut could help the U.S. economy -- which is good for the industrial application of silver -- and that inflation could rise -- which means silver might be a cheap way to hedge for those who don't want to shell out the cash for gold.

But not so fast, some industry watchers say. While silver looked shiny in the post-rate cut afterglow, its future is only so bright.

Jon Nadler of Kitco Bullion Dealers says people have to be mindful of the industrial usage before they jump in to use silver as a monetary or hedge tool against inflation. He doesn't see a rush of silver buyers jumping into the marketplace for that purpose. "It's OK, but it's not gold," he says.

Industrial demand for silver remains strong, with jewelry becoming particularly fashionable in recent years. "The physical side is solid; the jewelry market will continue to be strong," says Bill O'Neill, a principal with LOGIC Advisors, a commodities consultancy.

AND IF THE U.S. ECONOMY PERKS UP BECAUSE of the rate cut, silver's industrial side will benefit some more.


David Morgan, an independent precious-metals analyst with Silver-Investor.com, an online newsletter and advisory service, says in the near-term the credit crunch and concern about the health of the economy could put some downward pressure on silver's price. He expects at least one more credit-related upset in the stock market, which could cause another sell-off of hard assets to meet equity-margin calls. Longer-term, he sees a buying opportunity, particularly if silver slides back to the $10 level from $13.62 on Friday, noting its uptrend has not been violated and it could punch through the $15 support level. (Prior to the Fed's rate cut Tuesday, silver traded at $12.92.)

Still, Nadler believes the key to the future direction of silver's price appears to be in the investment demand component. He says the exchange-traded funds with well over 140 million ounces of silver in their grasp are important price determinants; they're mostly held by hedge funds and institutional traders.





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