-- Posted 3 February, 2011 | | Discuss This Article - Comments:

Just a few decades ago, China the Giant was barely a mortal.  It produced most of what it consumed, and the corporate mega-producers installed during the darkest days of Asian freedom and democracy produced all the commodities the country might need within its own borders.

One such commodity was the one we all love: silver.  In fact, China produced so much that it couldn’t use all of it, nor was it interested in holding onto the metal.  The country was a net exporter until four years ago, when at the height of the most recent credit bubble, net imports materialized.  Today, China consumes more silver than it ever has in history.

It’s not that China isn’t still producing silver—it is, but it’s consuming and hoarding more of it.  Through 2010, net imports increased some 15%, while exports fell by nearly 60%.  Such a fast swap from exporter to importer means additional strain on the silver markets.  From 2009 to 2010, total net imports surged three hundred percent in just one year.

Demographic Complexity

Of the more than one billion people who live in China, most live at or near poverty, while only recently a select few have been moving to middle class.  While the number of people advancing through society in raw percentage terms is declining, the number of people who are achieving greater purchasing power is exploding in nominal terms. 

If, for example, only 5% of the Chinese population were to rise to the ranks of “middle class,” it would be the equivalent of one out of five Americans doing the same.  Such an increase is mild, to say the least, but it commands even more from an already limited silver market.  Imagine what happens when many millions or even billions of newly middle-class Chinese demand cell phones, personal computers or other electronic devices.  Each contains silver, and each is a hot commodity in the developing world.

Rising Middle Classes

As has been covered previously, not all of the new demand is purely consumption.   As gold continues its rise, silver is slowly becoming the new “poor man’s gold,” a trend that appears not only in the developing world, but in the developed world as well.   In fact, it is becoming increasingly common for jewelry to contain diluted gold to reach consumer-level price points.  What are jewelers using for such dilution?  Silver.

Asian societies, governments, and populations have always had respect for gold and silver that is perhaps unmatched by any other geographic region.  For centuries and for many millennia, gold and silver were used exclusively for trade, as a currency and store of value.  Even through modern times, gold and silver are appreciated for their beauty and significance of wealth.

It would be wise to expect that any net increase in tangible wealth in the Asian markets will be met with nearly equal shifts in the consumption or savings of precious metals.  Timing is of the essence here.  With both India and China expected to achieve nearly double-digit growth rates, many millions more people are soon to join the growing class of silver stackers.

Dr. Jeffrey Lewis