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Investors should be prepared for silver to live up to its reputation for volatility in 2012. Barclay’s Capital predicts that silver will be the most volatile of the precious metals this year. And analysts warn that a ride in the silver market may not only be bumpy but it will likely include some sharp spikes and declines.

Crossing into a new year has not meant that we left behind the problems faced in 2011. The current state of global economic affairs paints a dubious picture for silver in 2012. These are, after all, the same conditions that produced an environment in which silver snatched back all of its gains last year. But, that does not necessarily mean that a downward trend of silver prices is predestined.

Price forecasts

The 2012 silver outlook can be described as cautiously positive.

HSBC, for example, revised their average forecast up $2 to $34/oz. However, analyst James Steel said “we are not unreservedly bullish.”

Looking at the forecasts of where silver prices will go shows numbers all over the chart. There are some that suggest silver could reach its record of $50 in 2012. ScotiaMocatta, says the metal may even reach $52. But, most agree that silver prices are not likely to maintain these high levels.

Where consensus does seem to gather is in a solid camp that predicts the average 2012 silver price to be in the mid $30s.

TD Securities put forth an average of $36.45, UBS said $35, and BNP Paribas forecasts an average of $35.75. There are some in the upper and lower $30s, such as Sharps Pixley at $37.25 and Barclay’s Capital at $32.50.

The inconsistency in the silver forecasts returns when you begin to look at the lows, which include low to high $20s and even some predictions dipping below the $20s.

Industrial demand

Prices this year are not expected to be driven up by silver’s industrial personality. HSBC predicts that industrial demand will likely support prices, but expects growth to be moderate. ScotiaMocatta made similar predictions citing cautious consumers and the outlook for a difficult 2012 as reasons for softening fabrication demand though new applications may result in modest growth.

Mining production was expected to increase by 30 million ounces in 2011 and by a similar amount this year. Production from recycling has been on the rise and is expected to continue in 2012. Silver is a commodity in surplus and there is little indication that will change anytime soon.

TD Securities predicts that oversupply is a risk for prices.”In the past, silver’s industrial side has generated deep corrections for the white metal and we don’t expect it will be much different this time around, with a correction to materially below $25/oz entirely possible,”the firm said.

Investment activity

Given the state of supply and the potential of a global slowdown, investors should not expect supply and demand fundamentals to be a real driver of prices. On the contrary, a strong silver market in 2012, if realized, is expected to rest on the backs of investors. Market sentiment will be, by most analysts accounts, the make or break factor this year.

Many long term investors seemed to have largely maintained their positions last year. Further rebuilding of long term investments is expected. Coin and small bar demand was also strong and is expected to remain positive in 2012. Together these investors provide more support for silver prices.

But the real volatile swings in prices are likely to come if and when speculators and safe haven seekers start avidly entering and exiting the game. Economic conditions are expected to be a draw and a positive fundamental for silver at times. But, investors should have their eyes peeled on why prices move when they do.

At the ETF Securities Precious Metals Conference, Steel warned that investors should expect a lot of volatility due to a number of false positives from the euro.

ScotiaMocatta warns that currency debasement and deflation could prompt safe haven interest in the short to medium term. However, the firm also warns that though investors may show up when in need of saftey, when it appears that the West is getting their finances in order, large scale disinvestment is expected as people will likely prefer assets offering better returns.

Though the US is still plagued with debt, investors should keep their eyes on positive economic data from that nation. The dollar has made a strong showing at the start of 2012 and if this continues, even with economic uncertainty elsewhere, it could be a struggle for silver to reel in safe haven cash.