In Ancient Egypt and Medieval Europe, Silver was often more valuable than gold. Till today the same theory is being followed. But last week the world market of metals were rattled with the fall of silver and gold prices. Silver made the steepest decline compared to 1983 levels of fall in the last week.

Margin Crash Ride

Silver prices plunged across the world market keeping every one on the table of quest of what made the fall of silver prices. Base metal prices were very much over leveraged or over brought in the past couple of months on a continuous basis. Silver is expected to have another correction from the last weeks closing by another 5% to 10%.

Correction in Silver rates is not only due to news of over stretched valuations but also due to increase in Margin by New York Comex exchange. They have hiked the margin requirements for silver trading to 84%. Which makes the margin requirements to rise up from $11,745 to $21,600 for margin and for hedgers from $8,700 to $16,000.

The increased in margin was second increase in a week as Two days prior to this increase, the COMEX had raised margin requirements. On April 27th, margin for initial contracts were increased from $11,745 to $12,825 and margin for maintenance contracts was increased from $8,700 to $9,500. As margin prices increases, this forces the market players to come up with more margins for playing in silver.

The collapse in silver prices on Thursday May 5th, triggered by the COMEX margin increases, indicates that many players were forced to liquidate positions to match the margin requirements going to hit floor from 9th of May. Before the increases, margins were about 5% of the value of a futures contract, which is for 5,000 ounces. After the plunge in prices, the cost after May 9 would be about 12% of a contract, using last settlement. The last two margin increases by the COMEX, after silver had already declined by over 17%.To add fuel to the fire liquidation of silver holdings by a hedge fund run by George Soros was also executed at that point of time. This is why the silver was in the headlines of financial streets.

You’re Demand and My Silver Investments.

In my last article I depicted the story of the upcoming growth of demand of silver which played according to its vomited words in the article. Silver is not only a being treated a as a substitute of Gold but also being extensively used in alternative energy segment. The industrial applications of silver increased by almost 21% to 487.4 million ounce.

In 2010 we find the demand for silver coming from global investment and fabrication demand. According to World Silver Survey demand of silver during 2010 increased despite of a 38% average increase in the price of silver to $20.19. The increase in silver prices during 2010 was the largest price gain since 1980.Silver investments demand increased by 40% in 2010 to 279.3 million ounces, double of 2009.

When we sneak into the ETF growth of silver globally we find a staggering growth to 582.6 million ounces during 2010, an increase of 114.9 million ounces over 2009. When we dig into the global use of silver in primary components we find some interesting growth demand:

• Silver used in coin and medal production rose by 28% to 101.3 million ounces.

• Sales of U.S. Silver Eagles reached 34.6 million, far ahead of the previous record of 29 million reached in 2009.

• Sales of bullion coins by mints in Australia and Canada also hit new highs.

• Investors also purchased 55.6 million ounces of silver in the form of bullion bars during 2010.

• Silver fabrication demand hit a ten year high of 878.8 million ounces, an increase of almost 13% over 2010.

• Jewelry increased by 5%, showing the biggest increase in demand since 2003.

Silver is going to make new records not only in 2011 but also in the next 3 years. We made an extensive research where we found that new demand for silver consumption is increasing.

• New industrial applications using silver are expected to account for an additional 40 million ounces of demand by 2015.

• Silver’s unique chemical properties are constantly leading to new industrial demand, one example being the development of products using silver as an antibacterial agent.

But with the increase of the demand of silver we need to keep in mind that procurement of silver form mines needs higher attention. Silver production increased by a very modest 2.5% during 2010 to 753.9 million ounces. We need to keep an eye on the explorations being carried out by the largest silver producer in 2010.The biggest mining zones are  Mexico, followed by Peru, China, Australia and Chile.

So by now my investors, my research colleges and other layman of the industry might be clear about the upcoming demand of silver the Substitute of Gold .This demand will make the price of silver to touch new heights in the coming days. The recent crash of silver price is a buying opportunity and it should be used accordingly. I have come across few investors who are fighting with anxiety of the recent fall as they have purchased at higher levels. A simple advice for them is that silver is a long term assets and not like short term. It’s a commodity and should not be entangled with other asset classes. Since every commodity has a life cycle and when the cycle end at the maturity stage the value of the asset increases along with its demand and price. Silver is just witnessing one of these types of cycles.

I between all I forgot to accentuate your attention that China is now on the buying spree of Silver along with Gold. Earlier we knew that china was accumulating gold and now silver has found the new address of accumulation in China. China desires to replace dollar as the safe currency and convert the savings into Gold and Silver. If china desires to replace dollar as a currency for reserves then China will have to accumulate gold to the tune of two times what US gold reserve has within the next two years. China has 1054 tonnes of Gold and US has 8133 tonnes of gold. So one can imagine how aggressive China will become in coming days for buying Gold.

Paper currency is now longer a value growth based asset. The rising defaults (bailouts of every economy) and rising crude import bill of every economy in the coming next 10 years will force all the nations to save their savings in Gold and Silver.

Silver should be bought at lower levels as they long term demand makes the price of silver to shine more than the original shine of silver. Silver should be brought and regarding these margin hikes and other activities one needs to treat them as a buying opportunity. Invest in silver for long term withering out the short term hiccups.

Indraneel Sen GuptaIndraneel Sen Gupta ([email protected] )

Global Macro Economic Researcher and Business Strategist

Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist

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Author Bio

Qualification: MBA
Company: IFAN Finserv Private Ltd.(SPA Group Company)
Location: mumbai, Maharashtra, IN
Member Since: 25 Sep 2019 | Total Posts: 130
God has been kind and the people with whom I have the journey of my career over the last 16 years have been great fortune to have them as my best friends standing today .Well, I hold more than 16 years of experience in the Financial Advisory, Global Macro Analysis and Business Development Strategy. View Full Profile

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June 2021