SAN FRANCISCO (MarketWatch) — Silver’s drawing more and more attention as an investment these days, especially from China.

That appetite has made silver bulls giddy and lifted prices closer to a record.

“Investment demand, not industrial demand, is what drives silver prices right now,” said Mark Thomas, author of email-alert service provider SilverPriceAdvisor.com. “World investment demand is starting to really pick up.”

China factory demand’s good sign

Chinese citizens are “now buying silver because gold topped out in 2011 and silver is much more affordable,” said Thomas, a silver bull who has recently tripled his exposure to the white metal.

And silver is starting to outshine gold. See Commodities Corner: Gold bulls come out of hiding.

As of Thursday’s settlement on the Comex division of the New York Mercantile Exchange, silver US:SIH3 has outperformed gold US:GCG3, with futures prices trading 5% higher this year, compared with a 0.4% loss in gold, and some analysts are touting the white metal’s prospects to achieve a record high this year. Read more on daily gold and silver trading.

Silver is “facing just as good a year, if not better, than the yellow metal,” said Jan Skoyles, head of research at The Real Asset Company, a precious-metals investment platform provider.

Silver is undervalued next to gold, has a finite and rapidly decreasing supply and it’s more accessible in greater quantities than gold, she said. All of these factors are “falling into place and becoming more acute, which therefore has driven up silver investment demand.”

At just under $32 an ounce, silver’s just a fraction of gold’s per-ounce cost of nearly $1,670, making it more affordable to the masses.

And in what some traders saw as a good sign of investment demand, the United States Mint earlier this month said it temporarily sold out of 2013 American Eagle Silver Bullion coins and suspended sales until the week of Jan. 28. Read The Tell blog: U.S Mint sells out of silver coins.

“The increased demand for silver coins, as well as record holdings in silver-backed [exchanged-traded products], indicate that increasing numbers of people are looking to protect themselves with wealth-preserving assets,” said Skoyles.

Holdings in silver global ETPs stood at more than 600 million ounces as of Jan. 18, compared with just over 300 million in late 2008, according to data from ETF Securities.

Popularity

Investment interest in China is a standout and is expected to see further growth in the years ahead.

China’s retail investment demand for silver is forecast to grow “robustly over the short to medium term, as a wider population base gains access to silver bars and coins,” according to a Silver Institute report issued last month compiled by Thomson Reuters GFMS.

In 2010, the first full year after Chinese government restrictions on investment in physical bars were lifted in July 2009, net demand for silver bars and coins totaled 9.8 million ounces and by 2011, reached 17 million ounces, accounting for 8% of global net purchases of silver bars and coins, the report said.

At the same time, “growth in paper trading of silver could turn out to be even more dramatic” than retail investment demand, “as a renewed silver rally and its low acquisition cost compared to gold should provide a strong boost to investor interest,” the Silver Institute report said. See the report on the Chinese silver market.

Gold and silver bars. Reuters

Paul Mladjenovic, author of Precious Metals Investing for Dummies, points out that in the Pacific Rim, silver demand is rising, with silver futures contracts increasing their market share in venues such as Shanghai and Hong Kong.

There has also been a significant boost in holdings of silver in other forms.

“The demand for investment silver in the form of silver ETF shares and silver coins is beyond seasonal demand,” said Julian Phillips, a South Africa-based editor for SilverForecaster.com. “It is huge and a feature of the last three weeks mainly.”

Among ETFs backed by physical silver, the iShares Silver Trust SLV, and ETFS Silver Trust SIVR, -0.03% have each climbed more than 4% year to date, tracking closely the gains in physical silver prices.

Overall, global investment demand in silver remains “tiny,” said Mark O’Byrne, research director at GoldCore. But that’s slowly “changing as allocations internationally gradually creep higher.”

The increased allocations to silver are already being seen in Chinese and Asian silver demand, as well as ETF and silver coin demand, he said.

And “contrary to simplistic analysis from some analysts, a slow down in industrial demand due to a global economic slowdown would not result in the end of silver’s bull market,” he said. Instead, “industrial demand would be replaced by investment demand as investors buy silver to hedge inflation and systemic risk.”

Temperment

But investment demand may not be strong enough just yet, some analysts said.

Will Rhind, managing director of ETF Securities, pointed out that industrial usage accounts for over 55% of overall silver demand so investment demand alone “will probably not be enough to sustain any meaningful price gains for silver given the macroeconomic backdrop.”

Then again, “if the global economy starts to grow again and industrial demand for silver picks up, any incremental investment demand for silver will most likely be price positive,” he said.

Meanwhile, silver’s well-known penchant for volatility remains a key concern.

When it comes to silver, “investment demand is far more capricious than industrial demand, so volatility can be huge and punishing to long-term investors and a joy to traders,” said SilverForecaster.com’s Phillips. Given that, “silver will remain far more volatile than gold.”