India Soaks Up Physical Silver Supply

India Soaks Up Physical Silver Supply

Written by Craig Hemke Sprott Money News

 

Rather than another discussion of charts and COMEX price projections, this week we thought we should point out a physical fundamental that has gone seemingly unnoticed in 2018.

Before we begin, let's be sure to give credit to Louis Cammarosano at Smaulgld. Louis diligently monitors global metal demand, and he brought this Indian demand issue to our attention last week. You can read his post here: https://smaulgld.com/india-silver-imports-april-20...

Let's cut to the chase. While the price of COMEX Digital Silver is being pounded lower in 2018, demand for actual physical silver in India is soaring. On Louis' chart below, note that the all-time peak in Indian silver demand came in 2015... when the price of COMEX Digital Silver bottomed below $14 and then began a 50% rally to $21 by mid-2016. In fact, the month of April 2018 alone saw India import 902 metric tonnes, the highest one-month total since December of 2015.

And it's important to understand the chart above in context. The 2,889 metric tonnes imported in 2018 is only through April. That's just 1/3 of the year, so to determine an annual run rate we need to multiply that 2,889 number by three. Thus, if current Indian demand continues at this pace for the rest of the year, total Indian demand will reach 8,667 metric tonnes for 2018, exceeding the previous high of 8,529 metric tonnes in 2015. 

But let's not stop there. How much silver is 8,667 metric tonnes? Is that a lot or a little? Well, consider this article from December of last year. The author cites a report from a group called Metals Focus, which projects total global silver mine supply in 2018 to be 867,000,000 ounces. A similar study from Jeffrey Christian's CPM Group pegs global supply in 2018 at just 817,000,000 ounces. (http://www.kitco.com/news/2017-12-22/Global-Silver-Mine-Supply-Expected…) Let's spilt the difference and call it 840,000,000 ounces.

Now back to India... How many ounces is 8,667 metric tonnes? About 280,000,000. So let's do some math. The entire world is going to produce 840,000,000 ounces of silver, yet India alone is on pace to import 280,000,000 ounces. Divide Indian demand into the total mine supply number and you find that India is on pace to import one third of all the silver mined globally in 2018.

Now you might expect that any one country sopping up fully one third of the global supply of anything would have a positive impact on price. But not in the bizarro world of COMEX digital derivative pricing! In 2018, it's not physical supply and demand that determines price. Instead, it's the supply and demand of the COMEX digital derivative that determines the physical price.

While the world only produces 840,000,000 ounces of silver, the COMEX in New York regularly maintains a total open interest of more than 200,000 silver contracts. At 5,000 ounces per contract, that's 1,000,000,000 ounces of digital silver. And with an average daily trading volume in excess of 100,000 contracts (http://www.kitco.com/news/2018-04-03/CME-Group-Lists-Record-Metals-Trad…), the COMEX trades over 500,000,000 ounces of digital silver every day! As you can see, it's not the trading of physical metal that determines price. Instead, it's the trading of the digital derivative.

Putting this all together leads us to the crux of the matter. Led by India, the world is on pace to consume all of the silver produced in 2018, yet the dollar price of silver is now down over 10% year-to-date. That's a dichotomy that must soon rectify itself. Either physical silver demand will crash before year-end OR the paper price will be forced to respond as it did in 2016.

Thus, watch these global physical demand numbers closely in the months to come. If Indian and global physical silver demand continue to surge, the digital derivative pricing system must respond with higher prices or it will risk collapse and failure.

India Soaks Up Physical Silver Supply

Written by Craig Hemke Sprott Money News

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Check out these other articles by our contributors:

Internet entrepreneur shops for a country - Peter Diekmeyer (17/07/2018)

A Path to Upgrade from Paper to Gold- Keith Weiner (16/07/2018)

Gold Bears Are Roaring Louder - Avi Gilburt (16/07/2018)

CHINA takes control of GOLD from the COMEX - David Brady, CFA (13/07/2018)

Eric Sprott discusses why there is truth in the "peak gold" theory - Weekly Wrap-Up (July 13,2018)

Comments

SybilDefense Wed, 07/18/2018 - 06:11 Permalink

Maybe its just that India recognizes a good deal when it sees one.  If they were so smart, 99% of them wouldn't be broke with a bucket full of worthless relic (like me).

In my next life I am going to come back as a central bank owner.  Being a sheep in consumers clothing isn't all that its cracked up to be.

chubbar SybilDefense Wed, 07/18/2018 - 08:15 Permalink

Not sure what the issue is here. The article shows that the world is buying all of the supply from mining. That is additional silver that is coming into existence above what already is in existence. That's additional supply being bought up, not silver in existence that already numbers in the hundreds of millions of ounces. Show me that all the supply PLUS millions of additional ounces in existence are trading hands and then I'll wonder why the price isn't going up.

PS, I agree that the paper trading controls the price, I just don't think this article makes the case for massive price suppression.

In reply to by SybilDefense

DarkPurpleHaze chubbar Wed, 07/18/2018 - 08:29 Permalink

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd.

Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

In reply to by chubbar

Bond Wizzerd chubbar Wed, 07/18/2018 - 12:01 Permalink

Seems like many readers on ZH have the patience of a 5yr old. As Bernard Baruch said, "Gold is money and nothing else". Silver has value in relation to gold and with gold at 83x silver is arguably cheap. That said, it is an industrial metal as well, and a byproduct of mining for other metals, so not as secure.

If you look at the 100 year chart, adjusted for inflation, silver holds its own. Your grandkids are more likely to benefit than you will, but is it worse holding a currently underperforming asset than it would be turning tricks or selling body parts to buy a loaf of bread(please see Venezuela, Zimbabwe, Romania,etc. etc. etc,)? I'm buying in here, because I fundamentally don't trust the Phd standard, and because smart people I respect(Druckenmiller, Dalio, Rogers, Kaplan, etc.) are too.

 

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

In reply to by chubbar

DarkPurpleHaze Wed, 07/18/2018 - 08:24 Permalink

I guess when the USDCNY/gold spiel (or USDJPY for that matter) falters it's easier just not to talk about it or move onto another metal and country.

Enjoy the article. Charts at link.

~~~~~~~~~~~

 

Yuan And Gold

Summary

  • Importance of the renminbi.
  • Is yuan capable of dethroning the U.S. dollar?
  • Relationship between the Chinese currency and gold.

In the previous editions of the Market Overview, we have already analyzed the relationship between gold and some major world currencies, such as the U.S. dollar, the euro, or the Japanese yen. But what is the link between the Chinese yuan (officially: renminbi) and the yellow metal? Let’s check it out.

Chart 1: The USD/CNY exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from January 1981 to September 2017.

 

As one can see in the chart above, there is no clear long-term relationship between the yellow metal and the USD/CNY exchange rate. It is hardly surprising, as the exchange rate of the renminbi was set not by market forces but by the authorities for most of its history. In the beginning (until the 1970s, when the Chinese government started to liberalize the command economy), the yuan was overvalued to support imports and reduce the country’s dependence on imported manufactured goods. However, it was devalued to 8.74 in 1994 to support exports. The Chinese government maintained the peg to the U.S. dollar at about 8.3 until 2005. Although the peg was then lifted, it was reintroduced in 2008 when the financial crisis burst out. It was maintained until 2010 when China returned to the managed floating rate system. So let’s analyze the link between gold and the renminbi since then.

Chart 2: The USD/CNY exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from January 2010 to September 2017.

 

The chart above also does not show a clear correlation between these two assets. The yuan appreciated since the removal of the peg to the U.S. dollar in June 2010 until 2014. In that time the price of gold reached its multi-year high and then collapsed. In 2014-2017, the renminbi systematically depreciated against the greenback, but the yellow metal was generally in a sideways trend. In 2017, the USD/CNY exchange rate plunged, which helped the gold prices to rally.

However, the decline in the exchange rate was caused by the weakness in the greenback rather than by internal strength in the yuan. As one can see in the chart below, in 2017, the renminbi did not appreciate against the Japanese yen and actually depreciated against the euro.

Chart 3: CNY/EUR exchange rate (red line, right axis, weekly averages) and CNY/JPY exchange rate (green line, left axis, weekly averages) from January 2010 to September 2017.

 

The lack of a clear pattern in the gold-yuan relationship does not mean that investors should not pay attention to yuan. First, the international importance of the Chinese currency has been rising recently. In January 2015, the yuan became the fifth most widely traded currency in the world, while in October 2016, it was added to the special drawing rights basket used by the IMF.

 

Moreover, China – which is the world’s biggest oil importer – has recently created a crude oil futures contract which is priced in yuan and convertible into gold. If such an instrument is adopted by oil exporters, the value of gold expressed in the U.S. dollar would likely rise, as the wide adoption of such a contract would lower the petro-demand for the greenback.

>>>However, yuan-denominated commodity contracts have been unsuccessful so far, so investors should not count on yuan dethroning the U.S. dollar anytime soon.<<<

Second, sharp changes in the exchange rate of the yuan can send shock waves through financial markets, having an effect on gold. As a reminder, in summer of 2015 China devalued the yuan, which pushed global equities lower.

>>>Hence, a devaluation of the renminbi would imply an appreciation of the U.S. dollar, which does not sound good for the gold market.<<<

However, the revaluation of the renminbi could also significantly affect the markets. This is because China purchases a lot of U.S. Treasuries in order to recycle its huge dollar surpluses (it buys foreign currencies to maintain cheap yuan, which stimulates exports).

>>>Hence, sudden sales of the PBOC’s forex reserves would increase the U.S. yields. Higher interest rates are usually negative for the gold prices, but the safe-haven demand for the yellow metal could then increase.<<<

 

>>>To sum up, despite the rising importance of the renminbi in the world, its link with gold remains rather weak.<<<

 

>>>Although perma-bulls believe that the U.S. dollar will collapse soon and the gold-backed yuan will replace it as the world’s reserve currency, gold investors should not invest in the yellow metal, betting on this scenario, as yuan is not as freely floating, liquid and transparent as the greenback.<<<

 

(Charts at link)

 

https://www.google.com/amp/s/seekingalpha.com/amp/article/4115766-yuan-…

everything1 Wed, 07/18/2018 - 08:36 Permalink

Physical demand is crashing, as it's the worst performing metal commodity right now.  The spread between buying and selling physical silver to your LCS makes it a horrible investment. Lets just say the spread is equal to half the cost of silver price ten years ago and the full cost of silver 18 years ago - buyer beware.  India just likes quantity discounts as you can see from the graphs.  Also, they are becoming an industrial powerhouse as you can also see from the graph.  The commoners of India want gold not silver.  Many countries are now hoarding product or raw materials because of the threat of tariff wars, not knowing what to happen, the big boys are stocking up, and I would wager to guess many are already stocking up on products or raw materials hoping for a profitable black market.

cpnscarlet Wed, 07/18/2018 - 11:41 Permalink

Lots of things to smell in India, Sprott.

 

Holy shit, TURD, the chart shows that India's silver input still won't be as high as it was in past years, even exctrapolated to December.

LIES, LIES, and MORE LIES.

 

Try an "Apology" for being so wrong...it's very soul-cleansing.

Conax Wed, 07/18/2018 - 12:07 Permalink

The Crimex says they "delivered" 16.4 million oz of silver for July 2017.

This month they say they will "deliver" 29.2 million oz.  Silver demand is not weak here, in fact it's on a tear.  Demand for coinshop bars and rounds here are weak, obviously, with the beatings every day. Man they hate that silver.

All the reports are tissues of lies, the price is a joke. If any mocket deserves to blow sky high, it has to be little ol silver.

I, for one can't wait.

MrNoItAll Wed, 07/18/2018 - 13:09 Permalink

Why do I suspect that they are deliberately suppressing the price of gold/silver in order to make it more affordable for India, China, Russia and other countries to load up on PM? If PMs are as poor an "investment" as so many comments on ZH claim, then WHY are these and other countries loading up on the stuff? The logical conclusion seems to be that all of these high quantity buyers of PM (at artificially low prices) are keenly aware of how fragile the global economy and all fiat are, they know for a fact that a giant global RESET is coming, and that the only money left standing after that reset will be what it has always been for thousands of years -- gold and silver. Or is my logic all wrong?