Bullion-Buying in China and India, Part 3

In Part 1 of this series, I discussed the general flaws in analyzing global, gold supply and demand. In particular, I took a closer look at the bullion market of China. In Part 2, I expanded on this theme, and shifted my focus to India's gigantic gold market. In the conclusion to this series, I will look at India's equally important silver market.

With these savvy bullion-buyers quickly adjusting to the "new normal" in the gold market, let's see if there have been any similar adjustments made in the Indian silver market.

The first observation to make is that by weight India's imports (and consumption) of silver have collapsed from levels of a few years earlier. Previously, Indian silver consumption fluctuated at a robust level of between 3,000 and 4,000 tons per year. In 2008, demand fell below 2,500 tons, and then in 2009 there was a huge plunge in consumption -- all the way down to around the 1,000-ton level.

The second observation to make is that unlike the gold market, where demand is roughly balanced between urban and rural consumers, silver is in much greater demand (generally speaking) from rural inhabitants. This goes with what I wrote earlier in this pair of commentaries: precious metals are the primary "savings instrument" of India's "peasant" population (which generally lacks any access to banking services).

While India's rural population certainly has no aversion to gold, their more modest levels of income dictate that what they can afford to purchase (to store their wealth) will be primarily silver jewelry. With the silver market in India being driven by its rural population, this adds another variable to Indian silver demand: the weather (and agricultural harvests).

This helps us to explain the collapse in Indian silver demand. In 2008, following Wall Street's ruthless take-down of global commodity markets, silver was hit much harder than gold. The flip-side of this is the silver market bounced-back much more strongly than the gold market. While gold experienced a trough-to-peak move of a little more than 40% in the run-up at the end of 2008, silver's move (in U.S. dollars) was more than 60%. Consequently, Indian buyers exhibited much more "sticker shock" to the price of silver than the price of gold. The plunge in demand was further aggravated by weaker-than-usual monsoon rains in 2009 -- which Indian farmers depend upon for a good harvest.