India’s bullion data usually attracts the attention of gold and silver investors given the scale of country’s population and its status as the second largest gold consumer behind China. Silver bars and coins are popular investments given how the banking sector has less penetration in the country and because lending is often backed by collateral such as gold and silver bullion.
India just imported its highest volume of silver ever in 2022 according to data from the country’s customs. Investment demand for silver jumped last year to a level not seen for seven-years at 2,470 tonnes of investment grade silver. The surging demand for silver bullion has been felt in the west, with bullion companies such as Auronum willing to pay 5% above the silver spot price to investors looking to sell silver coins above spot price.
The tightening of the physical market has not yet manifested into a sustained increase in the futures price which has caused some bullion investors to suspect manipulation by bullion banks. Increased investment demand is largely attributed to investors looking to park their funds in an asset that has not yet broken into new record highs like other popular investment themes in 2022.
Moreover, Silver’s low value allows lower capitalised investors to participate in the market which may otherwise have been priced-out of the higher value gold bullion market. This could become a very significant factor if gold prices keep rising because increased demand for silver bullion will push physical premiums higher.
India’s investors have purchased 22,700 tonnes of silver over the past twelve-years which reflects how bullish the nation is on silver as a future investment prospect. In fact, the only recent years which saw a fall in demand for investment grade silver bullion was 2016 and 2020 with the latter impacted by the lockdowns. The rise in silver prices during these years are also likely a factor as investors looked for prices to fall before purchasing again.
Gold prices have reached record highs against many major world currencies, such as the British pound sterling. As gold continues to trend higher, it prices more investors out of the market. Smaller capitalised investors and speculators could focus their attention to the lower value silver market which, in time, will cause the physical premiums of silver bullion bars and coins to rise significantly higher than what we see today.
Interestingly, mainstream investment media outlets rarely mention silver as an investment theme yet in Q4 silver managed to gain 35% against gold’s 10% rise. Many precious metal analysts have highlighted that the cost of extracting silver from the ground is approaching the price of silver which means, unless the silver spot price rises, silver supply will fall.
The price of precious metals is usually driven mostly by demand-side factors given that any shortfall in supply can be offset by the large inventories globally. However, some analysts argue that the current low price of silver is unsustainable due to the convergence of silver’s mining cost and the spot price.
This is not supported by the data, however, as silver mines remain highly profitable with net profit margins in the region of 75%. The World Silver Institute confirms that the silver all-in sustaining cost of production stands at $10.88 per ounce in 2022, with the silver spot price trading near $19 per ounce over the period.
Silver miners are enjoying a healthy profit margin with significant downside on the silver price needed before mining supply will fall. However, unlike many commodities, silver is significantly below its 2011 peak of $50/oz. The market is currently trading below half of that level which is unusual given that gold prices are trading near record highs in several major currencies.
This is a key reason to why some analysts suggest that silver is one of the most undervalued assets on the planet and with very little media attention it is likely that silver prices are at attractive valuations.
The issue with silver is that the price action usually remains flat for years before a spike in price is seen. This has resulted in the mantra ‘boring, boring, boom’ which is a very good description of the silver market. The issue for investors is lots of physical silver can find itself coming to market during the boom phase, resulting in sellers swarming buyers.
What has been observed in previous booms is that the physical silver price can be significantly below the spot price because sellers must reduce their ask to find a buyer willing to buy into the price spike.
This is where bullion companies are essential to the industry because they provide instant liquidity which is tied to the silver spot market. This makes silver a very attractive demand prospect because bullion companies offer instant liquidity in a price spike.
Silver is seeing very little speculation and is down over 50% from its 2011 high. Silver represents an excellent risk/reward prospect for investors at current valuations and should be considered by all investors looking to preserve wealth.