The silver price rally is being propelled by a combination of factors, not least of which is a rebound in Indian silver jewellery and silverware demand as well as the spectre of recession looming large over the world, informs bullion analyst Sanjiv Arole.
History, they say, has a strange way of repeating itself. In more ways than one, silver too has its own history to deal with. Way back in 2008, the sub-prime crisis in the US saw the whole world in tremendous financial turmoil that led then to a global recession. With the US Fed and most of other central banks pouring in easy money (quantitative easing), silver imports into Indian markets increased from around 1,280 tonnes in 2009 to 2,973 tonnes in 2010 and 4,118 tonnes in 2011. This was in spite of the rising silver price going up 38% from an average price of $14.67 per ounce in 2009 to $20.19 per ounce in 2010 to $35.12 per ounce (up by almost 74%) in 2011. Probably, the pump-priming of the economies around the world by many central banks in the Western hemisphere saw the economies recover faster from the Lehman Brothers-induced global meltdown and boost consumption as well as bring global trade back to normalcy.
Moreover, the Indian economy was fairly robust during that period and was able to withstand the recession better than most other economies at that time. During the 2009-11 period, the average silver price rose from Rs.23,815 per kg to Rs.55,638 per kg. In fact, during April 2011, silver not only rose to $49 per ounce plus in USD but rose to a then all-time high of nearly Rs.75,000 per kg in rupee terms. So, did all that was imported materialise into demand for silver in jewellery, silverware, investment or industrial usage? That would be too simplistic.
There was an element of speculative demand as many expected the silver price to scale Rs.1,00,000 per kg. Therefore, there was hoarding as well. But, since then Indian import of silver have been greater than 5,000 tonnes every year except in 2012 and 2016 with a high of over 7,500 tonnes in 2015. This continued till 2020 when the Covid-19 pandemic struck and the whole world came to a grinding halt.
Coming to the current year, news reports citing the Ministry of Commerce have highlighted the fact that India imported around 6,370 tonnes of silver for the January-August, 2022 period. It is believed to have crossed 8,000 tonnes by the end of September and estimated to even cross 11,000 tonnes by the year end. Although, the sudden spike in import of silver into India was common both in 2010-2011 and 2022 and for that matter even 2013, there was huge twist in the ‘tale’! ‘It is different’ in 2022. For, while 2010 and 2011 were preceded by recession from 2008 and it was in recovery phase propelled by quantitative easings by the US Fed, ECB and other central banks, in 2022 it is the other was round.
The Covid-19 pandemic brought the whole world to a grinding halt with lockdowns, labour unemployment, business shutdowns, deaths and no end in sight till a vaccine was found. To prevent global economies from hurtling towards a recession and deep depression, the US Fed and other central banks across the globe pumped in huge quantities cash directly into the hands of its citizens. So much so, that in the US, the already high inflation surged to a 40-year high, causing a huge concern to the Fed.
As the pandemic eased, the US Fed chief, with a focussed goal to tame inflation embarked on a rapid interest rate hike this year (2022) with 0.75% rate hike in the last three hikes of the year. Even though the pandemic and the Ukraine war saw both gold and palladium scale fresh highs in the first half of 2022, the silver high was just $26.150 per ounce in the year and the average silver price was $21.6 per ounce till November 25th of the year.
The US Fed’s rapid rate hikes did put a cap on all precious metal prices in the second half of the year. The sum total of all the above is a definite and imminent spectre of recession looming large over the world, Western world in particular. In fact, some countries are already into recession. Silver that last neared its all-time of $50 per ounce (1980), in April 2011 of around $49 per ounce has, however, scaled nearly Rs.75,000 per kg, in rupee terms once in 2011 and then again in May 2021. There is huge speculation that the silver price could spike towards all-time high levels as was the case in 2011, in the aftermath of the 2008 induced great recession. Many believe that history could repeat itself in silver in the aftermath of the impending recession.
Looking back at the Indian scenario, reports indicate that India actually imported around 8,200 tonnes of silver in the January-September, 2022 period. At this rate it could end in the 10,000 to 11,000 tonnes region.
A combination of factors has come to fore that are driving the silver demand. There is no doubt that a substantial part of the imports are driven by fabrication given that demand has increased at the ground level and that fabricators were aggressively restocking (after destocking earlier) to take advantage of the low price. There is a strong investment demand given that silver has been below Rs.60,000 per kg levels for long periods in the year. Even silver ETFs are now an option, with around Rs.1,400 crore being invested till the end of August and substantial interest seen during Diwali as well. There is also an element of the metal being locked up at the commodity exchanges to partake in spot-future arbitrage. Then, as recently as last week, silver options on a commodity exchange registered an all-time high turnover of 262 tonnes. Moreover, industrial off-take is on the rise given the increased demand for electric vehicles and solar panels that require silver.
Significantly, silver jewellery exports have shown a spectacular rise with exports of silver jewellery for the April-September 2022 period recording an impressive $1.746 billion. However, this was after an impressive $2.724 billion recorded for the April-March period of 2021-22.
Looking afresh at demand components of silver, it would seem history is being repeated from 2008 and 2013. Then too, silver was hoarded in large quantities in anticipation of higher silver prices. There were many who were left with silver purchased at around Rs.70,000 plus per kg in 2011 in the hope of the white metal soaring to Rs.1,00,000 per kg and who could only offload it only after climbed to around Rs.73,000 per in the recent past. Moreover, at the retail end, there is no excitement of any huge demand for silver in jewellery or silverware. In fact, some pockets did not report better numbers than the past year during Diwali.
The breed of unofficial speculators (dabba trading) too could have taken a punt on silver. Even the official commodity exchanges have reported high turnover volumes of silver. While it is true that CAD issues caused the government to raise import duty on gold and in turn may have investors in gold to shift to silver in a big way, it can still not explain the high import numbers. Probably, there is a need to have a relook at demand components of silver again.
The Silver Institute released its interim report on silver (produced by Metal Focus) just a fortnight ago. The salient features in brief are: (a) Global silver demand is expected to rise by 16% to 1.21 billion ounces in 2022. (b) Physical investment demand set to jump by 18% to 329 moz. On the other hand, silver ETFs are predicted to decline by 110 moz due to greater price volatility in silver. (c) Silver price expected to ease by 16% to $21 per ounce. Growing fears about recession and Fed pressure on interest rate hikes are behind the decline in silver prices. (d) Demand for silver jewellery and silverware are set to surge by 29% and 72%, respectively, to 235 moz and 73 moz this year. This is mainly due to a rebound in Indian demand and replenishment due to heavy stock depletion in 2021. (e) The global silver market is forecast to record a second consecutive deficit this year. At 194 moz, it is at multi-decade high and four times the level seen in 2021.
With the US Fed intent on taming the 40-year high inflation with successive 0.75% interest rate hikes in July, September as well already indicated December, after a 0.50% hike in the earlier of the year, there is a growing consensus that recession is looming large over the horizon. As yet, inflation has not declined significantly, a combination of high inflation and recession could make a heady cocktail for higher prices. The US Fed has already indicated a slight slowdown in interest rate hikes during 2023; such a possibility could come sooner than later.
The Indian investor/hoarder appears to have taken a punt on higher silver price in the near future. Many expect silver to scale Rs.80,000-90,000 per kg levels in the next year itself. As a result, they seem to have hoarded silver again this year as they had in 2008 and 2013. Will history repeat itself? But, with a major twist this time around. For, back then they were left holding a high value silver for more than a decade as the silver price nose-dived after 2011. Now they seem to have bought silver at a much lower price and waiting to reap benefits when silver scales $50 per ounce or thereabouts once again after a more than a decade. Will their gamble pay off? Only time will tell!
Acknowledgement: USD silver price kitco.com London price. Silver imports into India in 2022; Metal Focus. Silver jewellery exports, etc. GJEPC website.