Indian Investors Bail Out of Silver

MUMBAI – Silver appears to have lost its shine for most investors in India, with many preferring to transfer funds from the white metal to the dollar and even the equities market. Traders and analysts say that most investors are a bit skittish because of the metal’s wild price swings and are wary of global concerns that could dull its shine.

“As of last August, silver jumped over 175% to around $50 at the start of May. And then, it slumped almost 35%, to hit a low of $32.33 on May 12. Though it has risen to $38.18 over the weekend, the massive ups and downs are scaring people off,” said Santosh Mahendale, equities and precious metals analyst at a foreign brokerage firm in Mumbai.
Moreover, he added the dollar index has fallen on poor housing data emanating from the United States, which was another indicator that interest rates would not be hiked in the near future.

Analysts maintain that an interest rate hike in the US before mid-2012 would likely weigh on prices, in addition to the euro-zone debt fears.

Anshuman Daga, precious metal investor said silver has fallen by 28% over the past month, from a record high of $1,680.60 per kilogram on April 25, to $1,202 per kilogram on profit booking and a stronger dollar. “Apart from profit booking by fund houses, there have been successive margin hikes by the Chicago Mercantile Exchange. The exchange has raised margins to $21,600 per future contract from $16,200 per contract. They have also increased the maintenance charges by $2,000 from $12,000. All of this has impacted prices and has made investors wary,” said Daga.

However, bullion analyst Somesh Shah said that silver has outperformed gold and the equity markets and that silver is set to rise further. “Silver posted handsome returns of 69% over the past year, while gold only fetched 19%,” he said.

Shah’s brokerage house continues to push for silver arguing that since equity markets in India have turned volatile,  investors need to park a portion of their portfolio in commodities. They have also ascribed and linked silver’s fortunes to the dollar.

“Since 2000, the dollar has depreciated by 20%. But this cannot continue for a long time. Once the dollar starts appreciating, the price of silver is likely to slide. We can see the start of that happening now,” said Shah.

Analysts with foreign banks and brokerage houses have also pointed out that silver’s collapse had started a rout that sent global commodities’ prices diving by around 10%. Gold and silver are priced in US dollars, so a falling greenback makes them even more attractive to buyers using foreign currencies. However, prices of both metals have been weaker of late.

Analysts have also noted that when silver fell by over 30%, it dragged other commodities down such as oil and copper. In global markets, silver investors have resorted to heavy profit bookings over the past week. According to an analyst with Barclays, “Silver fund holdings fell by 520 tonnes. The largest fall was 555 tonnes in January 2008. Total metal held declined by just under 10%.”

Many investors in India, the world largest gold market, had turned to silver to beef up their portfolio. “At the start of the month, many consumers had stocked up on silver to reap better dividends from rising prices, compared to its costlier yellow cousin. Now, they are opting out,” said analyst Mahendale. He added that if the monsoon was good this year, demand for the white metal could well rise along with that of gold.

India imports nearly 900 tonnes of gold annually and another 3,000 tonnes of silver to meet local demand. The monsoons have already made their appearance in the south of the country.

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