Silver prices hit a 27-year high at $16.58 a troy ounce yesterday, rising in the slipstream of gold and platinum, the pacemakers of the precious metals rally.

Silver prices have risen 12 per cent this year, and its rally appears to be gathering momentum after an increase of 14.4 per cent in 2007.

"Silver is enjoying the benefit of being traded as a precious metal following the strength of gold and platinum," said David Holmes, head of precious metals at Dresdner Kleinwort. "If it were traded as an industrial metal at the London Metal Exchange, it would probably be trading sideways, in step with copper and aluminium."

Analysts are concerned there is a growing tension between deteriorating fundamentals in the silver market and the rapid growth in speculative and investor interest.

Growing investor interest has been reflected in increased inflows into silver exchange traded funds in 2007.

Holdings in the three big silver ETFs more than doubled last year to a record 5,914 tonnes.

Speculators are betting that silver's rally has further to run. Commodity Futures Trading Commission data show that speculative long positions (bets on further prices gains) rose 17 per cent to 41,083 lots in the week ending January 8.

One widely used method to measure the relative value of precious metals is to look at the ratio of their prices. This suggests silver is cheap compared with gold.

The gold/silver price ratio is trading at about 55, well below the 82.1 reached in June 2003 after the invasion of Iraq. When gold hit $850 a troy ounce in January 1980, the ratio was about 17.2.

In last week's London Bullion Market Association poll, all 21 of the analysts questioned predicted that this year's high for silver prices had still to be reached.

The LBMA's survey suggested silver would average $15.17 in 2008 but the spread of forecasts for the price peak and trough was wide, ranging from a high of $25 to a low of $11.25.

Eugen Weinberg, of Commerzbank, said: "History has shown that silver exhibits excessive increases and massive intra-day reversals in the final phase of an uptrend. For 2008, we expect to see a positive dynamic for silver, but investors should prepare for high volatility."

Silver's weak fundamentals are the main reasons for analysts' concerns.

New mine supply is rising strongly. Deutsche Bank is forecasting the silver market's supply surplus will rise from 66.2m ounces in 2007 to 82.5m ounces this year and 91.2m ounces projected for 2009.

The growing popularity of digital cameras has led to a sharp decline in silver usage in the photographic sector, down by about 22 per cent in the past two years.

A ban on the use of lead in solder in Europe has led to increased usage of silver as a substitute, but overall demand fell about 1 per cent last year and a further decline is anticipated in 2008.