Sanjiv Arole: Solving The Silver Mystery
Silver imports peaked at 5,000 tonnes in 2008 and again at 5,800 tonnes in 2013 even as the demand stayed flat in the interim years from 2007 until now. Gold and silver analyst SANJIV AROLE plays detective to unravel the multiple reasons behind the arrhythmic import graph of silver.
T he genre of spy thrillers, suspense dramas and murder mysteries have enchanted all and sundry. Be it an Agatha Christie novel or Sherlock Holmes solving a murder mystery, there are the usual suspects (the butler, the cook or the driver) before the plot takes several twists and turns and the real culprit is finally revealed. There is something similar about silver in recent years. Back in 2008, silver imports suddenly jumped from around 2,500 tonnes in 2007 to around 5,000 tonnes in 2008. However, what was interesting was that the silver imports during 2009 were just around 1,200-1,300 tonnes. What were the reasons for these sharp swings in the silver offtake? Likewise, in 2013, silver imports crossed 5,800 tonnes, sharply up from the previous year imports of 1,900 tones and in the current year the imports to date are around 2,000 tonnes.
Why has the dog barked twice? Of course, the usual suspects are the demand segments like silverware, silver jewellery, industrial and investment demand for the white metal. Merely apportioning the supply numbers to the various demand segments would be too simplistic. It would be naïve to believe that demand for the white metal would swing so wildly in a set of three years, twice in a matter of just 5-odd years. What is the mystery behind these demand swings? There is definitely something (fishy) about silver. Let us try to unravel the ‘Mysterious ways of silver’.
If one were to compare the years 2008 and 2013 and the circumstances that led to the record high silver imports, then and only then, could some light be thrown on what really could have happened during the two years.
The silver mystery in 2008
India’s aggregate silver import for the calendar year 2008 was close to 5,000 tonnes. In the last five months of that year alone, India had imported over 4,500 tonnes at least. It was in stark contrast to the average imports of 2,000-3,000 tonnes per annum in the previous 5 years prior to 2008. So what triggered this tremendous surge in silver import during 2008? Was it a sudden surge of pent-up demand or was there anything else to the silver story?
There were several factors that stood out after August 2008 that in turn contributed to the exceptional level of imports. (a) In the first 7-8 months of the year till August demand was very poor due to the price rise and price volatility. The silver market was in a slump. In fact, till July of the year, India imported only around 200-odd tonnes. In the 7-8 months prior to August 2008, the imported silver price (landed cost) was at a huge premium to the local market. At times this premium was as high as R2,000 per kg and much above that as well. That resulted in very little imports. All this changed when the landed cost of silver went at a discount to the domestic market in August. If one looked at the silver price, it was over R26,000 per kg in July. It fell to below R20,000 levels in August and fell to even in the R16,000- 17,000 levels in the subsequent months. This possibly triggered off pent-up demand for silver and India imported close to 4,800 tonnes in the remainder of the year. (b) The striking feature of the imports during the months of September, October and November 2008 was that in each of these months, imports crossed 1,000 tonnes, unheard even when India regularly imported around 3,500-4,000 tonnes per annum in the late 1990s and early 2000s. November imports were well above 1,500 tonnes. The other striking factor was that almost all the imports were shipped by air and not the regular shipment by sea. The higher cost of air freight plus the premium of 50 cents to a dollar also meant that silver was delivered quite quickly to the importing centres. Moreover, the imported silver was delivered to the parties almost on the same day it landed in India. It hardly remained in the vaults of banks (Scotia, etc), agencies (MMTC, etc) or the security agencies (Brinks, G4S, etc).
So, where did all the silver go? Was it consumed in silverware, silver jewellery or hoarded by investors? Was industrial demand for silver high in spite of the slowdown in the manufacturing sector? The common refrain being: Did the demand commensurate with the high import number? (a) Almost all market participants then opined that the huge import of silver was for delivery on the commodity exchanges. As was explained by industry sources, the landed cost was cheapest followed by the exchanges and silver was costliest in the open market. It also implied a fairly robust demand for silver after a prolonged and sharp decline for silverware and jewellery during the rise in the silver price in the last 5-odd years, prior to 2008. Most of the players were short on silver and when the price fell and there was import parity, both these factors combined and contributed to the exceptional level of imports. (b) The pace at which the imported silver went into the market suggested that there was real urgency to deliver the silver. Therefore, the high premium and air freight, too, did not matter. It meant that the silver price was so low that the higher additional costs were easily absorbed. If one looked at demand at the retail level it simply was not in tune with the level of imports. All of which suggested that there was a desperate need to deliver the silver to meet some commitment. This dramatic fall in price could have provided immediate relief for those speculators who held position around the highest price and expected the price to go higher. For them, silver at such low levels was the opportune time to deliver it to the other party. The exchanges also reported record delivery of silver. However, it too was not to the levels of imports seen. But, India also has an unofficial speculative trade in silver (gold as well) that continued all the years even when hedging was banned. The main centres being Indore and Jodhpur. However, one of the main factors was that there was no delivery