Gold is flat and silver marginally lower despite dollar weakness this morning. Some market participants are blaming the precious metal sell off on speculation that China may take more monetary action to curb surging inflation. This is unlikely to be the reason for the sharp sell off, rather it looks like another paper driven sell off in the futures market by leveraged players on Wall Street with various motives.
The fact that silver is again in backwardation at the front end of the curve suggests that tightness in the physical bullion market continues and may even be deepening. Indeed, the massive increase in silver bullion demand from China (confirmed overnight - see below) suggests that silver’s bull market remains very much intact despite becoming overvalued in the short term towards the end of 2010.
Table Courtesy of Mitsui
Surging inflation in China, India, wider Asia and much of the world is of course positive for gold and silver as it will likely lead to an even greater appetite for the precious metals in order to protect against the ravages of inflation and the further depreciation of paper currencies.
China, Gold, Silver and the Western Financial and Monetary System
A theme we have written about for many years is China’s growing importance to global financial markets and the global economy. As the most populous and largest creditor nation in the world, China’s influence and power continues to grow. Chinese power is being seen in currency, bond, commodity and other financial markets.
It is particularly seen in China’s huge appetite for precious metals and this is only being appreciated gradually. Many in western markets and finance continue to not realise the profound changes and long term ramifications of China’s emergence as a global superpower.
The world has changed and we are not reverting to the financial, economic and geopolitical conditions of the late 20th Century.
Silver in US Dollars – 40 Years (Quarterly)
China’s influence and massive appetite for precious metals is important both from a monetary and a geopolitical perspective. We warned of this some years ago – specifically writing about how the Chinese would gradually attempt to position the yuan as the global versus reserve currency, thereby replacing the petrodollar. We also wrote how the Chinese could use precious metals, and gold in particular, as a geopolitical weapon against the US and the west. Recently analysts, including the respected Jim Rikards, have eloquently outlined this real and growing risk.
China’s impact on the gold and silver markets will likely have ramifications for the western monetary and financial system and that is why China’s impact on the silver market is increasingly important. This is something we have wrote about for some time and one of the important factors driving silver’s bull market (see Money Week, August, 2007 article 'Why the Silver Price is Set to Soar'.
Silver’s Supply and Demand in China
Importantly and unknown to most analysts and people in the world is the fact that China was a net exporter of silver for many years – indeed China was a major component of global silver supply. This changed in 2007 when China became a net importer of silver.
The demand figures released by the General Administration of Customs in China overnight show the massive turnaround in China from large silver exporter to large silver importer.
China has gross exports of 1,575 tons of silver last year, down 58 percent from a year earlier, said customs. China’s gross imports of silver increased 15 percent to 5,159 tons in 2010, the customs agency said.
A longer term perspective is as ever important as are the net figures.
In 2005, China was a net exporter of nearly 3,000 tonnes (3 million kilos) of silver. Last year, in 2010, China imported more than 3,500 tonnes of silver.
Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010 (see table above).
Demand for silver in China has risen sharply in recent months and years. Growing middle classes and savers in China, India and other Asian countries have been turning to “poor man’s gold” and using silver as a store of value. Gold has risen above its historical nominal high in local currency terms internationally and silver is seen by many as a cheaper alternative.
Today buyers in China, Asia and internationally can buy some 50 ounces of silver for every one ounce of gold. The gold silver ratio today is 49.3 (gold at $1,342 per ounce divide by silver at $27.20 per ounce) meaning that 49.3 ounces of silver can be bought with every one ounce of gold.
Gold is increasingly unaffordable to the “man in the street” in China and wider Asia and this is leading to increased purchases of silver as a store of value, rather than gold. With the price of gold set to remain high in the coming years, this will continue.
Chinese and most Asians have experienced the decimation of their life savings through currency debasement and hyperinflation and unlike westerners understand the importance of owning gold and silver.
Besides huge demand for silver as a savings vehicle and a store of value in China, there is also very significant industrial demand in China and internationally.
There remain a huge range of industrial applications for silver. While demand from the photography sector has declined, demand from the medical, solar energy, water purification and many other sectors continue to rise significantly.
Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow.
Conclusion
Investors and savers in the western world should familiarise themselves with monetary history and why paper currencies always depreciate over the long term and why gold (and also silver) are vital in order to protect and preserve savings and wealth over the long term.
