Silver prices have rallied 12% in February but, according to French bank, Natixis, the rally is likely to be short-lived.

It explains that, over the past year, much of the focus within financial markets has been on the Federal Reserve’s tapering plans, with interested parties worrying that “that a lack of liquidity would squeeze more precarious borrowers, in particular developing countries”

See also: Silver to remain close to $20/oz -Standard Bank, Natixis

But, while tapering has begun, monetary conditions remain extremely lax. And, it points out, US bond yields have fallen since the beginning of the year, while the dollar has been weakening since the beginning the month.

“Both of these factors reaffirm the abundance of global liquidity, and help to explain the appreciation in precious metal prices since the beginning of the year,” Natixis writes, before adding, “To the extent to which lower US interest rates and a weaker dollar are associated with a weakening in the US economy, we would expect US economic data to improve as we move beyond the current bout of extreme weather which has dampened economic activity since December. This should help to raise US interest rates and strengthen the dollar, both of which would be negative for gold and silver prices.”

And, because moves in silver tend to magnify those in gold, the bank says there are additional downside risks to silver – especially given the amount of silver now held in physically backed exchange traded funds.

According to Natixis, the 19,340 tonnes currently held “is equivalent to almost 80% of 2012’s mined output”.

“If last year’s mass exit from gold ETPs was followed this year by sales from silver ETPs, this could rapidly turn into a substantial new source of supply just as happened with gold last year.”

And, while industrial demand for silver will pick up along with economic activity, “the price elasticity of this source of demand is low, hence it would be unlikely to be able to offset any substantial decline in investment demand.”

As with gold, investment demand for silver has grown into a significant pillar of demand, currently around 25% of total demand for the metal.

“Were this to fall to historical levels of 8% it would leave a big gap that industrial demand is unlikely to be able to fill,” the bank says.