-- Posted 2 November, 2011 | | Discuss This Article - Comments:

As fears of recession return, one major driver for silver consumption is still in play: India’s year-end festival.  Shying away from high-priced gold, the more affordable alternative seems perfect at current prices, and some analysts believe 2011 demand could come in 50% higher than in 2010.

The October-December quarter is expected to bring 250-300 tonnes of silver demand from India alone, a 50% increase over 2010 levels.  Gold, which is significantly more expensive in nominal terms, especially after fears of a European Debt Crisis contagion event, is expected to see a smaller 30-40% increase in demand.

India as a Silver Consumer

India is incredibly important to the silver market, a truth we’ve repeated in previous analysis of the Indian economic climate and currency.  The Rupee, which often maintains a very thin trading range to the US dollar, often comes into play when the currency breaks from a thin trading range.  When the Rupee is strong, silver, which is priced in dollars, becomes less expensive for Indian citizens.  When the value of the Rupee declines against the dollar, silver becomes more expensive.

Indian demand seems to be heavily levered to the exchange rate between the Indian Rupee and US dollar.  In spring trading, the Rupee fell 2.5% against the dollar as silver stalled out near $50 per ounce in April and May.  Later, silver would plunge nearly 40% in a broad selloff, partially the result of weakening demand from India and concerns about European solvency.

It was later discovered that during the May period, when silver ran to a 2011 high and the Rupee lost 2.5% of its value against the US dollar, Indian demand for silver plunged some 30% from the year-ago period.  Despite this previous decline in demand, total Indian silver imports should come in at 4,000 tonnes for the year.  In 2010, India demanded only 3,000 tonnes of silver.

Democratic Metal

We remain bullish on what is quickly becoming the precious metal of the people.  So far this year, China and India have remained important sources of silver demand.  In 2010, it was found that jewelry buyers in developed countries—especially the United States—were consuming less gold and more silver.  White gold, which is made of both silver and gold mixed together, became more popular.  A decline in demand for high-priced jewelry meant that consumers were switching their preference to mixed gold wedding bands and engagement rings.  Seeing as far more investment-grade gold than silver exists above ground on the earth today, a change in demand for gold means a disproportionately large change in silver demand.

Going forward, silver benefits from the same tailwinds that pushed the metal from $20 to $30 per ounce in 2010.  This year, the starting price is $30 per ounce, which gives credibility to calls that silver may end the year at $50 or more.  Regardless of the short-term, the long-term is incredibly clear: demand for silver will increase from consumers and investors, industrial demand should continue to grow as the solar and chemicals businesses pick up recessionary slack, and silver prices should rocket as a minute shift in demand brings about a much larger shift in price. 

Dr. Jeffrey Lewis

www.silver-coin-investor.com