Should silver be tracking gold?

Recently, the silver price has been tracking that of the gold price very closely, but do supply/demand trends support this pattern into the future?

LONDON - 

It has been very evident in recent months that the silver price has been tracking the gold price very directly.  Should this be the case?

There is a strong percentage of silver bulls out there who would say no - silver should be outperforming gold - after all it is trading below its long term price ratio with the yellow metal, but personally I am not convinced they are correct.  Much has changed over the years.  There is no longer any serious monetary element to silver and demand in the principal industrial market of photography is in long term decline as digital imaging takes over.  Jewellery offtake seems to be rising though which does help maintain market equilibrium. True there are other areas of industrial demand for the metal, but none are likely to generate as large a demand as photography.

What worries me with regard to the silver market is the seemingly huge number of new producers who seem to be able to bring new silver production on stream extremely quickly.  True the new mines are mostly small, but many sport very high grades so overall ounces of metal produced can be very high - and some MAJOR new producers are also in the pipeline and due for production within the next couple of years.  By-product output is also rising as base metal production rises in line with demand.

Silver output, therefore, is likely to show an increase over the next few years, while gold production is predicted to remain static or, more likely, continue to decline as it has for the past few years.

Logic therefore suggests that perhaps silver should not be tracking gold, but actually underperforming it.  But then precious metals pricing seldom seems to follow logical patterns based on supply/demand fundamentals.  Sentiment suggests that silver will, in fact, continue to track gold fairly closely, but I wouldn't bank on it exceeding the gold track and jumping ahead on its own. 

The weakness of the US dollar will no doubt continue to support gold and silver prices overall so the outlook for silver's price performance is that it will, in reality, probably remain close to that of the gold price.  But there is still the underlying niggle in my mind that increasing world silver output, without a corresponding jump in demand, will ultimately lead to a price performance decline which will not necessarily mirror the gold price movement at that time. 

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