The price of silver could increase about 40 per cent over the next 18 months and investors should buy shares in three Canadian silver companies that will benefit as the commodity catches up in price with the other precious metals, according to UBS Securities Canada Inc.

If you are an investor who likes gold, and believe that the U.S. dollar will weaken, then North American silver producers could be a good bet, said Craig West, an analyst at UBS Securities Canada.

But expect volatility, because the silver market is substantially smaller than either the gold or base metal markets and that can lead to exaggerated swings up or down, he said.

In a report to clients, Mr. West recommended Silver Wheaton Corp. (SLW), Pan American Silver Corp. (PAAS) and Silver Standard Resources Ltd. (SSRI) as “buys.” He rated Coeur d'Alene Mines Corp. (CDE-NYSE) “neutral.”

Silver traded today at $11.05 (U.S.) an ounce down from $15.20 in May after it had been driven up by speculation that the approval of a new silver exchange traded fund (ETF), which was launched in April, would increase investment demand and buoy prices. A year ago, silver traded around $7 an ounce.

UBS forecasts that silver will average $15 an ounce in 2007.

Silver Wheaton shares rose 39 cents to $10.47 (Canadian) in Toronto. UBS has a 12-month share price target of $12.50. Goldcorp Inc. owns a 57-per-cent interest. Silver Wheaton buys silver produced as a by-product from mines at a set contract price and sells it to smelters at the market price.

Pan American has plans to double its silver production by 2009 from 12.5 million ounces in 2005, according to UBS. The shares gained 90 cents to $19.71 and UBS has a price target of $24.75 (U.S.) on its U.S.-traded shares, which were changing hands at $17.32 on Nasdaq.

Silver Standard's mining properties are estimated to have over one billion ounces of silver resources, although it does not have any producing mines. Its shares traded today at $22.33 (Canadian) on the S&P/TSX. UBS has a $24 (U.S.) target price for the Nasdaq-traded shares, which were up 99 cents at $19.60.

Historically, silver and gold have traded at an average price ratio of 50-1, but it has recently underperformed gold, according to the report. The ratio is currently about 56-1.

“In today's market, silver, like gold, remains largely a play on investment and speculative demand rather than a pure commodity supply/demand story,” Mr. West said. However, silver is 10 per cent to 15 per cent more volatile than gold, he said.

The ETF has increased to 91.5 million ounces and if the growth continues it could result in even tighter physical markets and higher silver lease rates, according to the report.

In addition to investment demand, silver is used in photography, jewellery and industrial fabrication.