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As it becomes harder for Indian investors to get their hands on gold, their interest is shifting toward silver.
Like most commodities, silver has had a tough time these past few months, having fallen from close to $30 in mid-April to its current price of $19.32. However, good news for the white metal has recently arisen in the form of Indian silver import figures.
In a note published last Friday, Eric Sprott and David Franklin state that after importing just 1,900 metric tons (MT) of silver in 2012, India has brought in 2,400 MT of the precious metal in just the first five months of this year. That is significant given the fact that India’s record for silver imports, recorded in 2008, is 5,048 MT, as per SilverSeek.com.
Why the surge in imports?
In terms of precious metals, India’s claim to fame has long been its status as the world’s biggest gold consumer. It’s gained that title largely because people in the country have limited access to banks, and, according to Sprott and Franklin, “owning precious metals is synonymous with savings and security.”
However, at present, taxes and import restrictions are making it difficult for buyers to get their hands on the yellow metal. Seeking Alpha contributor Dante Caruso elaborates on those measures in a recent article, commenting that in May, the Indian government raised the gold import duty to 8 percent from 6 percent as part of its “drastic measures to redirect [gold] investment back into the economy.” Further, lending against gold, including gold jewelry and gold ETFs, has been restricted, while Reliance Capital and the All India Gems & Jewellery Trade Federation are attempting to curb sales of gold and gold-related products.
As a result “it would appear that the Indian gold trade has moved offshore” to get away from those factors, while ”the majority of Indian investors” — excluding larger investors — are gravitating toward silver, Sprott and Franklin state.
The implications
Unsurprisingly, these circumstances have investors wondering whether this year will see India break its 2008 record for silver imports.
More importantly, many are considering how the market will be affected if India breaks, or even approaches, that record. Shedding some light on that topic, Caruso states in his article that due to both silver’s cheapness relative to gold and the fact that Indians spend so much more money on gold than on silver — respectively $7.2 billion and $665 million in May — “[v]ery little redirection of gold investment into silver is required to have a major impact.”
Put more bluntly, that means that if even a small number of gold investors decide to buy silver instead, the silver market could easily be overwhelmed, with prices rising “very quickly” as supply diminishes.
With that in mind, it looks as though, like Sprott and Franklin state, silver will be the true winner in India’s “war on gold.”
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.