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The Capitalist | Could silver be losing its charm?

The Capitalist | Could silver be losing its charm?
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First Published: Wed, Mar 25 2009. 10 44 PM IST

Updated: Wed, Mar 25 2009. 10 44 PM IST
Silver has become almost as seductive as gold. It promises big financial returns. But, after prices touched a peak of Rs26,250 a kg in India on 15 July, silver hasn’t lived up to expectations.
Also See Silver And The Bull Run (Graphic)
There has been much speculation and slim data on which to base decisions. There are repeated hints that silver prices will overtake gold; last year such reports did enjoy credibility because after a gap of almost 30 years, silver indices appeared to be catching up on gold, as they did in 1979 and 1980. In 2007, the gap between silver and gold indices did narrow, but have begun diverging again. Many punters, however, are still betting on silver. They believe there are good causes for being bullish.
First, unlike gold where government holdings are almost 29,813 tonnes, silver reserves stand at barely 790kg. Hence, there is little possibility of anybody dumping silver to depress prices.
Even the excessive holdings of governments and traders in the late 1990s were liquidated by 2007. That’s why silver prices began climbing.
Second, unlike gold, silver has tremendous utility value. Almost 78% of gold is used as jewellery, and thus, depends substantially on sentimental and ornamental demand. For silver, such demand accounts for just 18% of offtake. Its biggest customers are from industries that include electronics, photography, chemicals, dentistry and even fabrics. With a little hoarding, on the one hand, and the tendency of silver to keep pace with gold, on the other, silver prices have the possibility of going up. They still haven’t. So what about the future?
Bear facts
Unfortunately, what is perceived to be an advantage is also a handicap. While silver prices were propped up in 2007 and 2008 by industrial demand, recessionary trends in industry have stymied its climb lately.
There is also the tremendous speculative nature of this metal. Very little data is available on how silver moves. Unlike gold, where the mines are few and tracking the metal is fairly accurate, a lot of mystery shrouds the movement, purchase and sale of silver. Barely 30% of silver comes from dedicated silver mines; it is mostly a by-product.
Not surprisingly, average mining costs of silver are barely 10% of the market price, thereby providing little compulsion for silver producers to support higher prices. At the same time, when industrial demand for copper or zinc declines, so does silver production. Silver thus remains a hobbled metal, precious though it may be.
India used to be a big consumer of silver, as it was the poor man’s gold. Rural folk sported bracelets and other ornaments made of silver. But that is rapidly changing for two reasons.
First, the increasing prosperity of the past decade has seen many consumers switch to gold. But more serious is the plague of contamination. Silver coins and ornaments have less than 50% of the precious metal and traders constantly cheat customers by palming off inferior metal, knowing well that rarely do Indians give up silver coins—which typically bear images of gods and goddesses—for melting. At best, they are passed on to others as gifts. And this contamination has begun to repel customers from both silver coins and silver jewellery.
Guffaw of the traders
Finally, there is the speculative element in silver—far greater than in gold, where currently paper demand for gold outstrips physical demand several times over. That makes gold and silver newly emerging asset bubbles, far more explosive than the oil or realty bubbles, as even poor people invest in them.
Not surprisingly, when gold prices crossed the $1,000 (now Rs50,800) mark per ounce, many Indian consumers sold gold, instead of purchasing the metal. Some did it to raise money when people were being laid off. Others sold gold—and silver—because they intuitively felt selling made more sense than buying. India’s selling pressure was a major contributor to the sobering of bullion prices.
The same is happening with silver. Consider for instance, that for the first time in India, almost 5,000 tonnes of silver was airlifted into the country between September and December last year. Nobody is willing to talk about who imported, or who took delivery. In fact, one reason why silver prices often appear to move in tandem with gold is because traders who deal in silver also deal in gold.
Normally, silver is shipped because given its price per kg, it is too expensive to airlift. But the speculative fever was high in India. Not surprisingly, when silver was short-sold, and some traders demanded settlement, 2,000 tonnes of silver was reportedly delivered in physical form within days, upsetting the plans of the bulls. There is enough stock of silver, and gold, lying in India today.
This and the distrust of silver by most knowledgeable consumers, given its contamination, may make silver less attractive in the near future.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Wed, Mar 25 2009. 10 44 PM IST
More Topics: The Capitalist | R.N. Bhaskar | Silver | Prices | Gold |