Commodity Trade Mantra

Record Gold Premium, Demand, Inflation And Equities Twist = Higher Silver Prices

Record Gold Premium, Demand, Inflation And Equities Twist = Higher Silver Prices

Record Gold Premium, Demand, Inflation And Equities Twist = Higher Silver Prices

The Indian banks and traders have suspended gold imports ever since the Reserve Bank of India made it mandatory on July 22 for shippers to set aside 20% of their purchases for re-export as jewelry. Importers need to show the government proof of actual exports before ordering the next gold consignment, which will disrupt supplies as jewelry exporters need an average 30 days to 45 days to submit proof of shipment. The RBI had linked imports to re-exports after shipments climbed last month from June. India had already by then, doubled a tax on imports to 8% from 4% earlier this year to tackle a record current-account deficit that’s pushed the Rupee to an all-time low against the US Dollar. Gold imports into India have been on a steady decline since June 2013 and shortage thus created may deny jewelers the requisite supplies before the festival and marriage. The festival season in India runs from August to October followed by the wedding season from November to December and then again from late March through early May. The fees paid by jewelers to banks and other suppliers have jumped to about $40 an ounce over the London cash price from $30 in the week ended Aug. 2, said Haresh Soni, chairman of the All India Gems & Jewelry Trade Federation. Premiums may surge to $100 if the government doesn’t ease the rules, said Bachhraj Bamalwa, a director at the federation, which represents about 300,000 jewelers and bullion dealers. Gold premiums may extend their advance to a record as central bank restrictions continue to hinder imports. “There is a halt in gold imports completely,” Soni said in a phone interview with Bloomberg on Aug. 8. “When one goes to the market to buy gold the dealers are charging heavy premiums. People who have stocks from previous imports are taking benefit of the curbs.” This has also been leading to a massive rise in gold smuggling (Wall Street Journal article) into India despite efforts by the Indian government to restrict smuggling.

India’s grinding halt of gold imports to have global price implications:

A decline in India’s gold imports may accelerate a 22% slump in global gold prices this year. Gold imports may tumble below 150 tons in the six months through December, less than the 175 tons estimated on July 22 after rules linking inbound shipments to re-exports were announced. India had imported 478 tons during the same period in 2012, according to World Gold Council. The shortage of gold bullion has cut the capacity utilization of jewelry units to about 50%. The Indian gems and jewelry industry employs about 20 million artisans and if the import norms are not relaxed, the whole industry will collapse and joblessness will increase.

Consumption in India, which imports almost all the bullion it uses, accounted for 20% of global gold demand in 2012, according to data from the World Gold Council. Gold is set to end a 12-year bull run as investors shun gold as a store of value amid speculation the U.S. Federal Reserve may initiate tapering to scale back its monthly stimulus. The halt to gold imports by India, the world’s largest consumer of the yellow metal can cause huge damage to the already weak sentiment towards gold prices globally. SPDR Gold Trust said its holdings rose 0.2% to 911.13 tonnes on Friday – the first increase since June 10. According to China Gold Association (CGA), China consumed 706 tonnes of gold in the first six months of this year, a rise of 54% year over year.  China consumed 832 tonnes of gold in the entire 2012.

Global Silver Demand:

The overwhelming demand for silver bullion right from the east to the west is undeniable. Despite a fall in silver prices for close to 2 years, a surging stock market in the U.S. and fear of tapering of Federal Reserve QE, demand for silver bullion has been consistently rising. Moreover, despite heavy and continuing outflows from the GLD – SPDR Gold Trust, the SLV saw a rise in inflows – a clear indicator of investor preference for silver over gold.  The Comex warehouses have dramatically emptied and the GLD has had to make large deliveries.

I had posted a few articles regarding the rise in silver demand. Here they are –

(India) – Silver is Winning India’s “War against Gold”  on June 29, 2013.

(China)- A Photovoltaic Silver Bull in China and What It Means for Investors

(U.S.A.)- Consistent Silver Demand Clears All Doubts On The Future Price Winner

India’s passion for Gold will be diverted towards Silver:

Indian households own about as much gold as does the ECB and the US combined. Aram Shishmanian, CEO of World Gold Council said, “It is well known that there is a deep belief in gold and its long-term prospects in India and China. Since the sudden drop in gold prices in mid-April, which was driven by the US investment markets, this belief has been reinforced.”  Historically, passion for gold in India has been massive and with this demand now being rendered unfulfilled, will find a vent in the next best available option – Silver.

The Times of India reported that:

Silver imports recorded a staggering 258.65% growth at 857 metric tonnes (MT) in the first four months (April-July) of 2013-14 as compared to 239 MT by July 2012. The imports of 274.922 MT in July are the highest in last five years in the first four months of a financial year. In fact, silver imports in July 2013 are the second highest in any month in the last five years. On the other hand, gold has seen a steep decline in imports in June (only 8.908 MT) compared to 37.618 MT in May, the second lowest in last five years. Overall, in the first four months, gold imports have grown by 104.27% at 78 MT. Experts say traders are importing more silver because of trade restrictions on gold by the Government of India since June 3. The decrease in silver prices over the last three months is also driving imports.

Moreover, based on the above average and timely monsoons, the 2013 bumper crop will boost available investment money from rural areas which accounts for over 60% gold purchases made in India. This huge sum will now have no outlet except silver – Think about the potential that only India hold for silver. I will now move over to another massive silver demanding country – China.

China’s demand for metals and Silver may add to the necessary momentum:

China is expected to embark on a major infrastructural expansion plan soon. Chinese demand for metals and silver is phenomenally large as usual and as growth resumes, this demand is expected to rise mutifold, especially for silver as explained here. China does not rule out the possibility of “unofficial economic stimulus” to help key economies like Shanghai boost their growth.

An article from South China Morning Post said :

China’s mainland government is quietly offering financial stimulus to key cities and provinces to help them maintain local economic growth. This is in addition to Shanghai taking up a huge loan from a state-owned bank to set up the first Hong Kong-like free-trade zone on the mainland. Government and banking industry sources familiar with the situation told the South China Morning Post that Agricultural Bank of China (Agbank), one of the big four state lenders, signed an agreement with the city government last week to provide loan credit worth 250 billion yuan (HK$314 billion) – equivalent to about 12.5% of Shanghai’s GDP for last year. This year senior government officials have repeatedly insisted that Beijing will not launch any nationwide economic stimulus – as it did in 2008 – to ensure that the world’s second-biggest economy will not see a significant slowdown. But the sources, who declined to be named due to the highly sensitive nature of the matter, said Beijing did not rule out the possibility of “unofficial economic stimulus” to help key economies like Shanghai boost their growth. Other banks may quickly copy Agbank’s loan plan for Shanghai and support other areas such as Guangdong province, where the export industry has been badly hit, the sources say. Such a huge loan arrangement by one state-owned bank for a mainland city like Shanghai is considered rare. Shanghai’s continued growth is strategically important for the central government to ensure that the country can meet this year’s 7.5% growth target. In late 2008, Beijing announced a massive 4 trillion yuan stimulus package to help keep the country’s economy growing during the financial crisis in the West. But it came under fire from many scholars and even some government insiders for being ineffective. According to an internal government memo seen by the Post, Agbank said it would support “the constructions of key international tourism and resort projects in Shanghai, in particular the Disneyland project” and it would also “play an active role in the construction of Shanghai’s free-trade zone”. The bank confirmed to the Post that it had signed an “all-aspect strategic co-operation” agreement with Shanghai, but declined to elaborate.

Expect an opposite side swing in the Emerging Markets Equities:

Emerging markets have priced in an event (Tapering of the Fed’s QE) that has not actually occurred and will look like an inverse of the U.S. markets soon enough, gaining strength on the upside as the US weakens further.

Read more for China markets – Some Shocking Numbers And Facts About Chinese Markets

The alpha spread against the S&P 500 suggests of big falls around the corner whereby US stocks fall and, ironically, emerging market equities serve as a sort of “safe-haven” trade. A global reflation resync may finally be getting underway and these reflation expectations will to continue to turn up. Traders today (most of them) assuming that it is impossible for Brazil, Russia, India, and China to rally in the face of falling US stocks would soon enough be proven to be highly wrong. In 2005, emerging markets rallied on an absolute basis as US averages underwent a corrective period. When emerging market stocks move, they tend to move much faster than anyone thinks is possible. Historically, emerging markets have had many 5%+ weekly up moves. As algorithms begin noticing an end to US momentum and a start to emerging market strength, it will likely become a self-fulfilling momentum trade that very few will see coming. There are times when positive alpha overwhelms negative equity beta.

Upside in copper and other base metals will show a surge in Inflation:

Copper, lead, zinc and aluminum have all started showing signs of renewed life and momentum. Copper is purely an economic barometer and given the upside surge seen in the past week along with the entire base metals pack, I am quite sure that metals are heading towards a new boom in demand and prices. That will endorse my expectations on the looming inflation. The world has been expecting inflation ever since the US Fed first announced its QE program. Inflation may finally raise its ugly head (officially) when least expected (while tapering). Inflation expectations have eventually started to show some meaningful acceleration.

Most unexpectedly, gold prices will not rise as much as one would like to see in such a scenario. Gold generally gets sold in times of high inflation, thereby leading to huge inflows of the metal into the market. Lower demand due to monetary tightness will lead to price freeze. A cheaper cousin of gold – that is silver, will benefit in such times due to lower prices in comparison to gold, but having the same (if not more) store of value qualities. Having said all of the above, on a fundamental level thus, Silver has more positive qualities than gold to contribute to a price rally.

Just imagine, what would occur when, along with all these monies (mentioned above) already pouring into silver, if even some portion of money from hedge funds, bond and stock markets also find their way into silver – Boom! That would be the final straw….

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