According to a recent document published by the Silver Institute (pdf), industrial demand for silver is falling. The table below, taken from the Silver Institute's publication, tells the story.
(Click to enlarge)
So what does this mean for silver prices, silver stocks (SIL) and silver ETFs like SLV and PSLV? Well, the table does show that monetary demand (listed as "coins and medals") is rising, and that this is offsetting the decline in industrial demand. But, as I've noted before, silver is inferior to gold as a monetary asset. Which begs the question: Is the increase in monetary demand in silver justified and sustainable?
In the United States, the state of Utah has taken the step of re-monetizing gold AND silver. Will other states, and more importantly other countries and supranational economic zones, follow? I'm a bit skeptical. If someone somewhere returns to a commodity-backed currency, I believe gold and gold alone will be what is officially restored as money. Gold is a better store of value because it is more scarce and more portable. Silver may be more liquid, but I believe transactions will be digital or paper-based - and so digital bits or paper bills tied to gold seem to me what the market will ultimately end up discovering as the best source of a monetary system.
As for industrial demand, it remains to be seen if silver can reverse the downtrend. Certainly, the global sovereign debt crisis is working against industrial demand of all kinds; so long as the debt crisis grows, savings rates will be abysmally low and credit markets will remain tough, and thus investments in future industrial production are at risk. And as the price of silver rises, industrial producers will find a greater incentive to find a substitute.
The scenario here illustrates the perennial problem with silver, which is that it is not the best at anything of use. Gold (PHYS) (GLD) is the best precious metal for monetary demand; base metals are better at industrial functions. There is perhaps one thing silver is the best at: Creating a fair gambling system. And this is one of the main reasons I think silver will rally, quickly and significantly, when its time comes -- as it has in the past. I believe there will be more rounds of quantitative easing and further expansion of the money supply as measured by MZM; the end result of this is that banks will have more capital to gamble with, and more capital to blow bubbles (see my previous post on where those bubbles might emerge). One by-product of this is a higher silver price.
To summarize, I suspect silver will continue to rise on speculative demand resulting from monetary expansion. However, given that industrial demand is declining and that gold is a superior monetary instrument, I think silver increasingly needs to be viewed in a speculative context. In other words: when price begins to rise too quickly, it's especially important to sell. Silver has always been especially volatile and I doubt this will change. If anything, I suspect its volatility will grow significantly.
Additional disclosure: I am long physical gold, physical silver, select silver stocks, and silver derivative contracts.