Silver's price is roughly half attributable to true physical, marketplace use of it. You would be hard pressed to go through a normal day without coming into contact with some manufactured product that contained silver. Switch on almost any switch and you've used silver (in the contacts). Look at the defroster coil embedded in the rear windshield of a car - made of silver paste. Photovoltaic cells. Batteries. 

So, as industry gears up, silver should go up. And if inventories are finally being drawn down as most experts believe they are, then that should push the price up even more as stocks need to be replenished. 

There is also jewelry-making and coin-collecting, which together make up about 10 to 15% of demand for silver. So, between those demands and industry, about 50% of silver is accounted for.

The rest of silver's price is affected by speculation, store of value, and minor safe-haven buying. Strictly speaking, this can't be separated from "real" use. But for clarity's sake we will. Silver is an alternative to gold as a financial instrument. When the market believes gold is too volatile or too expensive, it often turns to silver. 

Silver is also a way to make big money on the tick, as it were. And, while silver has fallen quite a bit until recently, it really was a matter of time before it floated back up. 

Right now, according to the Silver Institute, "Primary silver mine cash costs rose to $8.88 an ounce, reflecting higher prices for labor, electricity, and maintenance charges." That price does not reflect shipping charges, storage, insurance, or middleman commissions. Suffice it to say that it puts the price over $11 per ounce. When the exchange price of an ounce of silver fell, production fell. 

Finally, at around $18.50 an ounce production was severely curtailed just as demand began picking up, as discussed above (due to macro economic trends worldwide).

Even with some significant drag due to a slightly stronger dollar, silver is up about 0.8% today (at 4:30 NY time). Gold, facing the same dollar head winds, is up around 0.65%. 

The two main dancers factoring into gold's rise this week are the troubles with equities and continuing QE3. 

There are many traders who believe the current phase of the stock bull has run its course. Others are not so negative but neutral. That alliance has taken some starch out of the Dow and the S&P, although techs seems to be relatively strong - and attracting speculative money.

When money managers move away from tried and true stocks (blue chips, for instance) they seek to balance their portfolios with instruments that store value or offer some kind of guarantee of return. Gold and government-issued bills immediately come to mind. 

Ten-year T-bills are yielding 2.83% as we write. 

Worker productivity started to grow again in the second quarter of the year. Labor costs, however, were up a rather squishy 1.4%. In the first quarter, labor costs were down 4.2%. YTD labor costs are down 2.8%. That is an indicator of how inflation might go in the months to come. 

We will be discussing what we think will be happening with the FOMC next month as the September meeting draws closer. In the meantime, whether you're in silver, gold or both, pray that members of the Fed keep their mouths shut.