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Silver loses shine in top buyer as prices rocket to record high

Imports of the metal by India have fallen 47% in the first half of 2020.
Image: Bloomberg

Silver consumption in India is set to halve in 2020 as buyers, mainly from rural areas, skip purchases amid surging prices and a weak economy.

Imports by the world’s biggest consumer may tumble by as much as 50% this year from about 6 000 tons in 2019, according to Chirag Sheth, a consultant at London-based Metals Focus Ltd. Imports were down by nearly half in the first six months of the year to 1,735 tons, he said

Silver prices in India have rallied more than 60% this year to record highs as bullion gets a lift from declining real bond yields, a weakening dollar and chronic uncertainty over the global economy. That combined with the hit to the economy from coronavirus-related lockdowns that shuttered businesss, resulting in millions losing their jobs, are curbing demand for the metal.

“Silver fundamentals remain weak due to low industrial offtake,” according to Harish Galipeli, head of commodity and currencies at Inditrade Derivatives & Commodities. “However, prices are up tracking higher gold prices and it’s purely investment demand driven at this moment.”

Silver jewelry demand, which comprises more than a third of total consumption, may drop by as much as 25% and silverware usage by 30% to 40%, Sheth said. Nearly two-thirds of India’s demand for precious metals comes from the rural parts of the country as they are considered as an insurance against bad times due to a lack of good banking infrastructure.

“If you look at the market post 2011, for a few years the rural consumers just went away and they did not buy any silver because of higher prices,” Sheth said. “We have to see if the same trend plays out this time as well.”

The country imports most of its silver, from places including the UK, mainland China and Hong Kong. Locally, Hindustan Zinc produces about 600 tons annually.

© 2020 Bloomberg

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How long can gold hold its giddy shine?

An attempt to answer the question would be to look at a “Gold/Stock Ratio” chart specifically gold’s relative performance to the S&P 500. Since WWII only three clear inflection points occurred on the chart indicating “gold should be bought and stocks sold”, in general. The first inflection point for buying gold on the mentioned chart was in 1970 leading to a massive 10 year bull run in gold until around 1980. The second inflection point for buying gold was around 2000 leading to another massive 10 year rally in gold until around 2010. The third inflection point for buying gold on the chart occurred (not surprisingly) “early in 2020”. There is a good probability that we are entering a new secular bull run in gold (and precious metals) that can extend for a couple of years, taking into account the unprecedented macro economic dynamics currently developing in the world due to Covid-19 and specifically the uncontrolled “printing of money” by the big central banks of the world. This could lead to an extended period of deflation (note not inflation)and stagnation of some major economies in the world, specifically the USA.

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