Silver, known for being a market of extremes, is living up to its reputation this year.

Prices rallied 17 percent in the first four months of the year, only to reverse and wipe out those gains. Despite the selloff, investors are pouring money into exchange-traded funds, and assets have reached a record 21,211 metric tons, valuing the holdings at $11 billion.

To investors sympathetic to the portfolio-diversification potential of precious metals, yet desirous of an asset with practical “real world” applications, we offer for consideration the unique fundamentals of silver. In this report, we explore the compelling investment utility of a portfolio commitment to silver.

I could be whistling in the wind, but I wonder if silver’s decline over the past month has been a desperate attempt to shore up some liquidity at Noble. Although we probably will never know for sure, I take solace in the fact that if I am correct, then most likely Noble will have no more silver to sell.

Global silver mine production declined by 0.6 percent in 2016 to a total of 885.8 Moz. A large proportion of the drop was attributable to the lead/zinc and gold sectors, where production dipped by a combined 15.9 Moz. On a regional basis, Mexico registered the largest drop in production last year, followed by Australia and Argentina, yet those losses were partially offset by gains in Central and South America and Asia. Even so, Mexico was again the world’s largest silver producing country, followed by Peru, China, Chile and Russia.

Primary silver mine production grew by 1 percent to realize 30 percent of total silver mine output last year. Lead/zinc mines contributed 35 percent of 2016 by-product output, followed by copper mines at 23 percent and gold mining at 12 percent.

Silver scrap supply fell to 139.7 Moz in 2016, a level not seen since 1996, despite higher silver prices. The contraction was largely driven by lower Asian flows, due in part to lower industrial fabrication volumes. Scrap supply from the industrialized world was also muted, as partial jumps in flows from the United Kingdom and Europe in general, offset falls in North America and Japan.

London's silver price benchmark is plagued by big, unpredictable fluctuations that risk undermining its credibility and may complicate efforts by the London Bullion Market Association to find a new operator, according to a Reuters analysis of trading data and 10 industry sources.

The benchmark is used by silver producers and consumers around the world, including jewelers and electronics firms, to price their contracts in the multi-billion-dollar a day trade.

The figure generated at noon London time is intended to be a fair and accurate daily snapshot of the wider, fast-moving "spot" market. However, it has diverged widely from the spot price on a number of occasions since at least January 2016, leaving buyers and sellers with unexpected gains or losses, according to the Reuters analysis using Thomson Reuters data.

The strength of silver prices is largely due to improving sentiment among institutional investors. Changing expectations towards the outlook for U.S. interest rates and the proliferation of negative policy rates across other key reserve currencies has rekindled institutional investor interest in precious metals. Meanwhile, a marked improvement in silver industrial offtake, led by photovoltaics, which achieved a record high last year, is also helping. All these factors in turn have fueled investment inflows into silver futures, options, exchange traded products (ETPs) and over-the-counter products.

CME Group and Thomson Reuters are to step down from providing the LBMA silver price benchmark auction, the London Bullion Market Association said on Friday, less than three years after they successfully bid to provide the process.

"In consultation with the LBMA, CME Group and Thomson Reuters have decided to step down from their respective roles in relation to the LBMA Silver Price auction," the LBMA said in a members update seen by Reuters.

This is one of the critical factors that must turn to signal a real bull run is coming. We did elect a Weekly Bullish in silver on Friday but not gold. However, we did get a Minor Monthly Bullish at the close of 2016 both in gold and silver. For a real bull market, we need the silver/gold ratio to break 60:1. It is currently in the 69:1 range. Here is a chart with 200 years of data for this ratio. A bull market requires BOTH metals to rally. Gold may have more trouble since it is being tracked by all governments. You cannot mail it outside the country nor jump on a plane with 10 ounces. Silver may become more viable if the world actually moves to electronic currency. So this ratio should start to come in after 2017.

If gold reaches $10,000 which I believe is a minimum without hyperinflation, that would give a silver price of $666 to $1,000. These are clearly levels that sound totally unrealistic currently with silver at $17 but are likely to be achieved within 5 years or so.

Going forward, however, industrial demand for silver is expected to recover due to several tailwinds. Firstly, the ongoing growth in the global solar PV industry is expected to continue, especially in China. This should continue to drive silver volume growth in the sector; more importantly, solar PV manufacturers are now hitting the limits of silver “thrifting,” i.e. it has been increasingly difficult for them to reduce the silver content in each solar cell. Secondly, demand for silver in the electronics sector—after having peaked in 2010 at 74.6 million ounces—is expected to recover.

As such, I expect global industrial demand for silver to rebound in 2017 and for it to embark on a structural uptrend over the next several years.