Indian silver bar and coin investment now the largest sector in the domestic market

The Silver Institute's World Silver Survey 2009 describes borrowing patterns in the silver market in 2008, and notes that the financial markets' liquidity drainage was not the only factor at work behind silver lease rates last year.

LONDON - 

The latest World Silver Survey from the Silver Institute, compiled by independent research house GFMS Ltd., includes a study of silver borrowing rates and notes that for the first seven months of 2008 silver leasing rates were kept at very low levels. This resulted from a combination of factors, including another reduction in the size of the producer hedge book; a modest drop in global fabrication numbers and also, and arguably more importantly, the impact on fabrication-related borrowing of high silver prices and the crisis in the credit markets. These latter factors saw a number of fabricators reduce the level of their inventories and work-in-progress in order to make sure that the value of their silver borrowings remained within the credit limits imposed by their lenders. 

Fabrication itself contracted by just less than 1% and while this fall remains heavily concentrated in the photographic sector as a result of the relentless onslaught of digital technology, all other areas registered declines. Silver demand in photography, which twenty years ago accounted for more than 50% of silver industrial demand, has now dropped to just 12½% of offtake. Over the past ten years photographic usage of silver has dropped from almost 7,100 tonnes to just less than 3,300 tonnes, a fall of 54%, or an annual average rate of contraction of 8.3%. Industrial applications, by contrast, have been increasing at an annual average rate of 3.1% as new uses have proliferated. 

Investment activity in coins and medals soared, especially at the retail level in the US and Europe while professional and institutional investment was reflected in the increase in ETF holdings, which during 2008 amounted to 2,894 tonnes. This was equivalent to almost 90% of the amount of metal taken up by the photography sector and 43% more than coin medal investment. Since the start of this year silver holdings in ETFs have continued to increase at a healthy rate, adding 2,121 tonnes to a total of 10,388 tonnes, which is equivalent to five months' industrial demand at last year's rates. 

While the ETFs, and bars and coins markets experienced "an uninterrupted advance" over the course of the year, the Over-the-Counter (OTC) and futures markets met heavy liquidation in the second half. The OTC and futures markets experienced speculative buying followed by massive liquidation in the second half of the year, triggered in large part by the collapse of Lehman Brothers and the crisis spreading through the rest of the financial sector. Silver (and gold) met massive sell-offs as investors looked to raise cash for margin calls and the price tumbled from a July peak of $19.30 to a low in October of $8.80. 

As we go to press on 13^th May the silver price is trading in excess of $14 as investors are returning to the metal in anticipation of further strength in gold and on the basis of a bearish dollar outlook and longer-term inflationary fears. 

An important point highlighted by the Survey is the change in the nature of silver investment in the wake of the Lehman Brothers collapse. As investors took fright at the concept of paper, physical metal holdings took priority and the demand was "staggering". Retail investors, high net worth individuals and the wealth management industry all flocked to the physical arena, with the OTC market one of the casualties of the migration to physical holdings while the increases in the ETFs encapsulated the stampede into the physical. This was not confined merely to "western" markets and there was an unprecedented level of demand from India. 

This physical investment was characterised by extensive delivery delays, rising premia and, in some cases, extended shortages in popular bars and coins. The US Mint was a case in point, citing "unprecedented" gold and silver coin demand along with "unusually high" demand for platinum; the Mint suspended the sales of some coins in order to concentrate on one-ounce Gold One Ounce and Silver One Ounce coins. The Mint's latest figures show that silver one ounce coins in the first four months of 2009 reached 9.7 million ounces against 5.8 million ounces in the first four months of 2008, and they remained high in the first half of May. 

The Survey notes a structural shift in investment preferences in India over recent years. Bars and coins have been taking increasing favour over the traditional high-carat jewellery. This is partly due to increasing consumer awareness of issues concerning under-carating in the jewellery industry; this was compounded last year by low local silver prices with bullion demand growing "exponentially" and GFMS estimates that it accounted for 53% of overall demand in the Indian silver market last year, surpassing the combined demand from jewellery, silverware and industrial uses. 

This explosion of investor interest was enhanced by low prices, especially with the local price falling below Rp17,000/kg by November, a drop of 35% from the July peak. It looks as if following Indian trade patterns this year will prove particularly instructive.

www.silverinstitute.org. Those residing outside of North American can go to www.gfms.co.uk.

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