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How much more demand can silver handle?

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Damir Sagolj / Reuters / File

(Read caption) An employee shows a bar of gold and silver, the final product of the Chatree gold mine operated by Akara Mining, in Phichin February 17, 2011. The current demand for silver is high, but can it stay like this?

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The numbers for silver demand are starting to make some market-watchers nervous. The US Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This question is important for various reasons, starting with how demand contributes to price. If demand falls off, silver investments would obviously suffer.

While I’ve discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let’s focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this – the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. – but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world’s largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

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