-- Posted 23 June, 2011 | | Discuss This Article - Comments:

As we enter the summer doldrums, a period when many investors leave the financial markets for warm beaches and relaxing vacations, India has come onto the scene as a topic of choice.

The Cycle of Silver

It is around this time of the year that silver available for sale dips before supplies increase in the fall.  During the autumn season, however, demand for silver usually rises on Indian festivals and seasonal trends in purchases for monetary metals.  This year, analysts have concluded that prospects for gold and silver purchases from India, a major importer of commodities, will dampen short term returns for investors. 

This couldn’t be further off the mark.

Generally, analysts have taken to India’s metrics, announcing that annual growth is slowing to the rate of inflation, suggesting that the nation that is poised to grow 8% this year will do so only because inflation is running at a hefty 8% rate as well.  Long-term forecasts are being revised as the country looks at slowing direct investment.  FDI, a measure of long-term investment in the form of factories, plants, and capital equipment, is failing to keep up with the last decade’s impressive growth.

Indian Inflation and Silver

Of course, stagnation may make for a poor metals market in a developed world economy, but India is not at all developed.  And to that end, Indian investors have reason to go to gold and silver when their economy stagnates.  With inflation roaring at 8% per year, and the economy slowing, investors will tend to favor investments that protect wealth rather than grow it.  Indians could store their investment capital in cash, but what incentive is there to remain in cash when it’s losing value at an 8% annual clip?  There is no incentive.

Instead, Indian investors would be better to hold gold and silver to protect their purchasing power, just as Americans are doing to protect their purchasing power against an out of control Federal Reserve.  Unlike the United States, India has a long history of favoring precious metals, and there is very little reason to see why this wouldn’t be as true in the future as it has been in the past. 

What investors should fear is a central bank that overshoots the mark in India due to inflation that is largely structural.  In truth, the Indian government is hardly pro-growth—each year Indian truckers spend a whopping $5 billion to skirt the bureaucrats to move products from one end of the country to another.  Where it takes a week to move goods from one end of Europe to the other, it can take several weeks to do the same in the highly-corrupt developing world.

At some point, the emerging markets will come crashing down, but not because of any lack of trying on their own—emerging markets are as crippled by government as any developed world economy.  Regulations, restrictions, and a general anti-business climate mean that consumers and investors alike will have to sit on the sidelines in gold and silver to protect their wealth.  Ultimately, that’s a bullish sign for gold and silver, even if it’s bullish for all the wrong reasons. 

Dr. Jeffrey Lewis

www.silver-coin-investor.com