India will buy 22% of world silver production and 44% of investment silver this year as tax hits gold consumption

Mumbai-India (Dec 7)  India has emerged as among the biggest consumers of silver from almost zero a year ago because the taxation of gold is switching precious metal investors to the second monetary metal, David Franklin at Sprott Asset Management told our friends at Agora Financial

In the first six months of 2013 India imported 130 million ounces of silver, a trend that has continued throughout the year. Taxes on gold have hit 10 per cent this year in India, more than many investors are prepared to pay. Silver is the natural alternative. Indians will buy around 4,800 tonnes of silver this year, a huge amount.

Huge silver investors

‘For perspective, the world’s silver mines produce approximately 24,000 tonnes of silver, so this new buyer is purchasing approximately 22 per cent of world silver production, compared with almost zero last year,’ said Mr. Franklin.

‘And when you consider that approximately half the silver production is used for investment purposes, Indian buyers are on track to buy 44 per cent of the world’s mined silver available for investment.’

US silver eagle sales have already passed the total for 2012 and are set for a record year. Silver ETF holdings are up six per cent over the past twelve months. Gold ETF holdings by contrast are down by a phenomenal 30 per cent.

That naturally begs the question so why are silver prices so low? Silver prices tend to track gold with outperformance to the upside and underperformance to the downside.

Price discovery

Despite the shift in physical buying from gold to silver in India the actual price is set in the Comex futures pit by the trading of electronic futures contracts that are a hundred times more numerous than real ounces of silver. It is a gross price manipulation away from physical supply and demand. Price discovery has lost its compass.

However, Indian buyers of silver are far from being fools. They are taking advantage of a pricing anomaly to buy silver at very low prices. Once this anomaly corrects, as anomalies always do in the end, then they have every chance of making a fortune on their silver bullion.

If only we could say when this will happen. Still for a patient, long-term investor knowing that it will happen ought to be enough.