Silver is increasingly becoming a global monetary metal, mostly due to inflationary concerns and the debasement of the world’s major currencies. And that’s the main driver for silver’s surging bull market, according to some key players in the precious metals investment sector.

Rising inflation in China and India, as well as Europe’s ongoing sovereignty debt crisis, are major contributors to gold and silver reverting back to their traditional “safe haven” status, according to New York-based James Steel, a precious metals analyst for HSBC Securities.  

Referring to his big league investment house as “the world’s largest bullion bank,” Steel says silver’s role as a monetary metal is gathering the most momentum in emerging economies. Ones that are growing at three times the rate of the established industrialized world, he says.

“The macro economic trends from emerging markets are therefore positive for both gold and silver,” Steel adds.   

In particular, China’s growing middle classes – which now number well over 400 million people – are fueling an “explosive” growth in demand for silver as a hedge against fast rising inflation. So says a spokesperson for the Industrial and Commercial Bank of China (ICBC), the world’s largest bank by market value.

ICBC sold 418,000 ounces of physical silver to Chinese citizens in January, alone, compared with 1.06 million ounces for the whole of 2010, according to Zhou Ming, deputy head of the bank’s precious metals department. Other Chinese banks have been just as busy.   

Notably, China was a net importer of over 100 million ounces of silver last year, whereas only a few years ago the fast emerging superpower was exporting an equal amount annually. And China’s ravenous new demand for silver as a store of value in inflationary times is growing exponentially. This is illustrated by the fact that silver imports last year increased four-fold over 2009.

So the pressure is on for the world’s mining community to ramp-up production to meet burgeoning worldwide silver demand, mostly from investors but also from the increasingly silver-reliant industrial sector. However, annual demand is on the verge of outstripping supply. By way of explanation, silver is primarily extracted as a by-product of gold mining – an industry that’s already operating at peak capacity. Furthermore, there’s only a small handful of primary silver producers, which are likewise hard pressed to replace mined-out reserves with new supplies, especially in the near-term. 

Exponentially increasing global investment demand is already threatening to overwhelm existing silver supplies, according to Eric Sprott. A long-time precious metals investment guru, he’s the founder of the Toronto-based investment firm, Sprott Asset Management. His renowned Sprott Hedge Fund is heavily weighted in precious metals and has generated an estimated 23% annualized return over the past decade.

Such a surge in demand can only drive silver prices higher, Sprott says. That’s because the mining industry’s annual output (at around 600 to 700 million ounces per annum over the last decade) is a relatively inelastic supply, in spite of the sustained bull market for silver prices.  

He also points to the fact that the sovereignty debt crisis is deepening in Europe and a continued policy of quantitative easing in the U.S. is continuing to undermine the value of the greenback. Both of which are compelling enough reasons for investors in the northern hemisphere to be equally as enthusiastic for silver as the Chinese and Indians.

This flight to quality and out of fiat money (currencies that aren’t backed by hard assets) bodes well for both silver and gold, according to Nathan Narusis. The business developer for the Toronto-based gold and silver oriented mutual fund, the BMG Bullion Fund, says he likewise believes that silver is “beginning to assume its role as a monetary metal.”

“Both mid-term and long-term trends are therefore in place to ensure gold and silver will continue rising through 2011 and well beyond,” he adds.

Silver has stolen much of gold’s luster as of lately. Its spot price spiked by 83% last year, whereas gold posted a much more modest, yet nonetheless very impressive 30% gain.

The grey metal’s dominant outperformance of gold is set to continue, according to another precious metals expert, Ken Gerbino. The Los Angeles-based precious metals hedge fund manager, who runs the Gerbino Gold Group, says that physical silver will remain more popular among investors because its lower unit price makes it much more affordable.

“Because silver is the poor man’s gold, it will outperform gold in 2011 and for years to come since 90% of the world’s populations are poor,” he says. “As inflation rates in China and India increase over the near and medium term, precious metal buying should accelerate.”

However, Sprott is far more colorful in his like-minded assessment of the situation: “Asian demand for physical gold and silver is like a tsunami,” he says. “The inflation resurgence in Asia is quietly driving new, unforeseen levels of physical demand for these metals.”

“While the world continues to float on a sea of paper, this massive wave of physical demand silently threatens to crash into the physical gold and silver market, wiping out tangible supply.”