EDITOR: | July 22nd, 2013

Gold bounces but silver doubts remain; India clamps down on gold imports

| July 22, 2013 | No Comments
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Gold bounces but we are still waiting to see silver get a similar uplift. A report out this week casts further doubt about silver — but this correspondent is not fully convinced that we need be so gloomy (and I have appended my own comments in parenthesis below).

The anti-gold crowd would have got a shock when Tuesday’s session at Comex closed. The yellow one jumped $42/oz in that one session, closing at $1,336/oz. Silver was back from the bottom of the mine shaft, too, getting back over $20/oz. And remember that just a week or two ago the air was rent by the doom-sayers claiming it was all over for the precious metals.

Not quite.

But there is still some doubt about silver. In a report out from London’s Capital Economics, Ross Strachan and Julian Jessop cast doubt over the analyst consensus that has silver outperforming gold as both continue to recover in the next year or so. The gold silver ratio — now at 1 to 66 — is at its highest since August 2010. (Historically it was 1 to 16.)

They argue there are three reasons silver will drag the chain. One, silver prices are more volatile than those of gold, in part because the market is smaller and less liquid and partly because silver is often mined as a by-product or co-product of other activities, making silver supply from these mines less sensitive to price movements. (And, this writer adds, the world’s biggest producer, Cannington in Australia, is also a base metals mine.)

Two, says Capital, industrial uses account for around half of silver demand, compared to just 10% for gold. This means that silver will be more vulnerable to the weakness in the global economy. (Yes, but this writer would add that silver has many exciting growth areas, especially in health applications; and much greater potential in this respect than gold.)

Third, in the view of these analysts, gold is more likely than silver to benefit from strong demand from households and central banks in key emerging economies, namely China and India. “Silver simply does not have the same cultural or sentimental appeal as gold, nor is it as well-established as a financial asset,” they write. (Whoa, there! In China’s case, there is deep “cultural and sentimental appeal” for the white metal: until the 1930s, while other countries had been on the gold standard, China’s currency had been backed by silver. For the Chinese, silver occupied what they called a “three-tiered throne” — as a standard of value, as a medium of exchange and as a store of value. It was estimated in 1936 that Chinese savers had hoarded about 1.75 billion ounces of the white metal. In India’s case, silver is sought by those who cannot afford gold.)

Strachan and Jessop expect the gold silver ratio to climb to 1 to 75, with gold at the end of 2015 at $1530/oz and silver at $20/oz.

But I commented here (as the gold price took its most recent dive) that you should not write off 3,500 years of history quite so easily. In silver’s case, make that 5,000 years.

As the Washington-based Silver Institute reminds us, silver was first mined in about 3000BC in what is now Turkey. By 1000AD, Spain was the leader in silver production, mines there being the principal suppliers for the Roman Empire. Silver was the instrument of trade. But, once the Moors invaded the Iberian peninsula, Europeans had to get their silver elsewhere and this led to many mines been opened by 1500AD to meet the growing demand for the metal.

But then came the discovery by Europeans of the Americas. Following the Spanish conquests, Latin America became the great source of silver; for 300 years, Bolivia, Peru and Mexico between them accounted for more than eighty-five per cent of the world’s output of the white metal. Centuries later came the Comstock Lode discovery in Nevada. Australia, Canada and many other countries and colonies also became silver producers.

Anyway, readers might find the following statistics of some interest. These figures are supplied by the Silver Institute.

Top producing countries (2012, millions of ounces)

Mexico 162.2
China 117.0
Peru 111.3
Australia 56.9
Russia 45.00

Top silver producing companies (2012, millions of ounces)

KGHM Polska Miedz 41.0
BHP Billiton 39.0
Fresnillo 36.9
Goldcorp 30.5
Polymetal Int. 26.5

Top producing mines (2012, millions of ounces)

Cannington, Australia 32.23
Fresnillo, Mexico 26.38
Dukat, Russia 15.50
Uchucchacua, Peru 11.26
Pirquitas, Argentina 8.62

GOLD: According to All India Gems and Jewellery Trade Federation, India’s gold imports could drop to 175 tonnes in the second half of 2013, down from market forecasts of 373 tonnes. The lower forecast was prompted after the Reserve Bank of India mandated that all banks and agencies must export at least 20% of all gold imports and make gold available locally only for jewellers.

“This will make our life miserable, these are indirect ways of restrictions on imports (for domestic jewellers),” Haresh Soni, chairman of All India Gems and Jewellery Trade Federation (which has more than 40,000 members) told Reuters

The commodities analysts at the Commonwealth Bank of Australia say the measure will likely lead to a shortage of gold during India’s festival season from October to December this year, a period associated with seasonally higher gold demand. The sudden drop in prices led to Indians importing 162 tonnes in May alone. The price recovery saw this drop to just 31.5 tonnes in June. But Reuters says the authorities remain anxious ahead of traditional times for buying gold.

(This writer adds: Indians have got around previous crackdowns on gold imports by smuggling, including through Bangladesh. Expect that to kick back in.)


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