Silver price: silver tsunami from India

To understand the potential of the silver price moon-shotting as the “investment of the decade,” according to Sprott Asset Management’s Eric Sprott, investors must wrap their minds around India’s tsunami demand for the metal in the coming years, which is expected to soar as the country’s 1.1 billion consumers rapidly rise in global per capita purchasing power parity (PPP).

When the talk of Indian gold jewelry demand arises, the gold tonnage imported to India is typically cited. And it’s breathtaking, with a lot of that gold slated for India’s spiritual season, called Deepavali, or ‘Festival of Lights,’ which begins in mid-October and ends in mid-November.

The World Gold Council anticipates India to import 1,000 tons of gold by 2012, or maybe even this year, as yearly imports to the second-most populated nation of the world expected to reach the equivalent of Switzerland’s total gold reserves.

“Demand for jewelry was the biggest contributor to gold demand, accounting for 54 percent of the total,” bullion expert Frank Holmes wrote in a February piece for MineWeb.com. “That’s a 17 percent rise despite gold prices jumping 26 percent in many currencies.”

Holmes continued, “India led the world in gold jewelry demand with more than 745 tons. China was a distant second at just under 400 tons and the U.S. third at 128 tons. While the pace of consumption has slowed in several countries, gold consumption for jewelry remains at elevated levels around the world.”

But what about silver?

As India proceeds to Vasubaras, the first day of Deepavali celebrations in the state of Maharashtra, traders and business people consider this day an auspicious one “for making important purchases, especially metals, including kitchenware and precious metals like silver and gold,” according to Wiki. As the demand for gold rises in India, silver demand rises as well.

Another factor which could drive higher India imports of silver is the high cost of gold. Malaysian news outlet, The Star, reported that the rally in the gold price has created a problem of affordability among many Indians. Many Indians have always struggled financially to purchase the sacred metal for religious ceremonies, with some families spending their entire life’s savings on the wedding of their young bride. But gold has increasingly become more prohibitive to many families in India as the rally enters its 11^th straight year of higher prices.

But, as in any ‘commodity’, the market adapts with a little bit of substitution along the way—with producers using a little less gold and a little more silver to output the final product.

“By using innovative techniques, we can flatten 22-carat gold and then stuff it with an alloy that is a mix of copper and silver to give the ornament weight,” says Amit Prakash a Delhi-based jeweler.

How much silver will be involved in this substitution? It’s difficult to estimate; no statistics are available. But a small number multiplied by a massive number equals a big number.

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Posted by Silver Guru on Oct 29 2011. Filed under Silver Analysis, Silver prices. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry