India Will Dominate the Silver Market in 2013

Precious metals have surged back in the last few days as the gravity of the situation in Washington hit investors. Equity market participants who seemed so sure a compromise was at hand on Friday afternoon, were disappointed Monday that no deal had been achieved. With the S&P at post-shutdown lows, it seems precious metals have caught a bid. Since the start of the shutdown gold is up almost 3% and silver has appreciated by nearly 6% as investors have ruminated on the implications of a default by the US Government.

With silver falling by 26% so far this calendar year, even factoring in the recent surge, you’d be excused for presuming there were negative fundamentals developing in the market for the white metal. Indeed the fundamentals have been changing, but they all favour the price of silver. Unfortunately for investors, this has not yet been reflected in the price.

The most recent import data from the Indian government confirms reports that Indians are importing significant quantities of silver. The latest data, provided to us by Nikos Kavalis from Metals Focus Ltd., shows that India imported US$1.78 billion worth of silver during Q2 – a 311% increase over the same period last year. This equates to 3,015 tonnes of silver in the first half of 2013, putting Indians on track to import more than 6,030 tonnes of silver this year. If this trend continues through the rest of 2013, we would see the highest silver imports in the past five years. As we examined the Indian import data in more detail we saw that silver is coming to India from all corners of the earth to satiate demand. The most notable sources have been the UK, Switzerland and China. Many countries that had not previously shipped the metal to India are also making their first shipments this year. The Indians have become an enormous new buyer of silver, sopping up bullion supply from around the world. Putting these numbers into perspective, according to the Silver Institute, the world produced 24,478 tonnes of silver in 2012, meaning the Indians are currently on track to import 25% of the world’s mined silver supply. And, believe it or not, this number could increase given the forecasts for monsoon season.

According to Robert Prior-Wandesforde, head of regional economics at Credit Suisse, this year looks like it will be a bumper year for crops. On average, in the year following a drought year (such as 2012), output has risen by more than 11%. This figure is thought to reflect not just higher-than-normal rainfall but also additional government support in the form of fertilizer, etc. Prior-Wandesforde estimates that an 8% rise in output this season would add 1.1% to gross domestic product growth. “This is unlikely to represent the total effect,” he said, noting that agriculture still accounts for more than 50% of India’s total employment. “One would expect the associated rise in incomes and profits to feed through to stronger consumer and investment spending. Also, a sharp increase in the food supply should help bring down inflation, boosting real purchasing power and influencing the central bank.”1 Given the Indian consumer’s predilection for storing savings in gold and silver jewelry or bullion, we can expect a favourable monsoon season to drive precious metal demand, especially silver.

From looking at the chart of silver prices you would never know that such a fundamental change in demand has taken place in the silver market. We wonder what it will take to wake the market up to the opportunity in silver. Clearly it has already responded to the shutdown and the potential of a default by the US Government, however this belies the strength in underlying demand for the metal as a store of value for Indians who will dominate the market for silver this year consuming as much as quarter of world mine supply. We expect the price to catch up to this reality shortly.