The Indian appetite for silver is as legendary as it is for the more expensive precious metal gold. In fact, for both the metals, this country is counted as the world’s leading importer and user. Being a voluminous importer and at times surprising the world like in 2008, Indian moves have a significant bearing on world silver prices.
In the years since 2003, India’s silver imports have seen some major fluctuations. If the high point was reached in 2008 when imports totalled 160 million ounces, thanks largely to currency arbitrage inspired buying spurt in the second half, the next year saw imports dipping to 40 million ounces.
The mainstay of the Indian silver market continues to be the industrial and jewellery and silverware sectors. A significant portion of jewellery and silverware demand emanates in rural and semi-urban areas. In recent years, however, this country too has started discovering the virtues of precious metal in silver as the steady rise in investment buying of bars and coins will confirm. More and more people here are using silver as a speculative commodity play as many others are looking at it as a safe haven asset.
Indian Bullion Market Association, however, also sees in the growing fear of being handed undercarat jewellery and silverware a reason for the growing preference to buy silver bars. Even then as GFMS, the world’s leading precious metals consultancy, says in its Silver Survey 2010, though the global jewellery demand in 2009 once again saw marginal erosion to 156.6 million ounces, buying improved both in India and China.
Last year, the high prices of gold pushed some consumers towards silver and precious gems. As a result, the decline in global demand for jewellery was arrested to 1.1 per cent.
Demand shrinkage is mainly on account of silver not catching the fancy in Western markets like before and also destocking at trade level. In the process, Italy and Thailand, from where the West mainly sources jewellery, once again took a beating. In contrast, reversing an uninterrupted three-year spell of offtake fall, silverware met with demand gain of 4.6 per cent to 59.5 million ounces. Interestingly, as GFMS points out, this is entirely driven by “trade stock related gains in India.”
GFMS says that mainly on account of India, jewellery demand will take a “marginal” knock this year when silverware will also meet with less demand more as a result of “secular shift.” In the last ten years, the world jewellery demand was down 8 per cent and silverware as much as 38 per cent. But because of technology changes silver use in photography sector had suffered a major fall of 62 per cent. What is seen as strengthening of belief in silver as a precious metal is the 145 per cent demand gain since 2000.
Industrial applications accounting for as much as 48 per cent of total silver use are what principally drive the physical demand for the precious metal. As a severe recession raged for most of last year, industrial consumption of silver fell 20.5 per cent to a six-year low of 352.2 million ounces. Improvement in industrial demand in evidence since the final quarter of 2009 should gain in steam on hopes of stock replenishment and higher world GDP growth. So far, however, industrial consumers are not showing signs of restocking. They are buying silver to meet their immediate requirements. Whatever that may be, silver will come for greater use in making of photovoltaic cells, plasma TVs and special batteries.
Since 2000, world silver mine production grew 20 per cent and output last year was up 4 per cent to a record 706.9 million ounces. As for this year, GFMS is forecasting a further mine production rise of 3 per cent with the bulk of growth coming from gold and base metals mining sectors. At the same time, government stock liquidation will be low. The world will once again see contraction in scrap supply.
Demand fundamentals are no doubt better this year. Even then the market will remain in substantial surplus which, however, will be taken care of by investors. Investment demand for silver was up a stunning 90 per cent last year to 215.6 million ounces. GFMS chairman Philip Klapwijk says continuing improvement in investment demand and rebound in industrial uses will take silver to $20 an ounce.
Even while silver broadly shadows gold, chances are that this year it will outperform gold. GFMS thinks there could be a “more decisive” silver price breakout before the year ends to take it past the London high of $20.98 an ounce in 2008. Klapwijk says demand for silver is a “function of the economy, not of the price.” The silver market is no doubt drawing inspiration from the IMF forecast of world GDP growth of 3 per cent in 2010. But till the eurozone problems are settled, all markets will have to put up with uncertainties. That will explain why silver is forecast to trade in a wide range of $16.40 and $19.50 an ounce through July.
