Silver Price Forecast Based On China’s Viral Demand

February 26, 2014

 Silver in Chinese Is pronounced “Yín”

My research leads me to believe exploding Chinese investment demand during the next six years will drive the price of silver to over $500/oz, which will in turn fuel the price of gold to $8000/oz.  And here are the rationale for this sterling prediction.

Chinese are the world’s Top Savers

China saves the most money in absolute terms. In 2010 China saved an estimated $4.6 trillion. For those who do not have a concept for this monumental amount, it is $4,600,000,000,000.  In sharp contrast, the United States, whose economy is nearly double the size of China’s, only saved an estimated $2.8 trillion.  Moreover, Chinese on average put away 30.6 percent of their disposable income, amounting to 6.9 trillion yuan in total household savings in China in 2012, estimates Louis Kuijs, chief China economist at Royal Bank of Scotland (RBS) in Hong Kong.

China expert Orville Schell said the country’s savings may come as a surprise to outsiders. “They see this exuberant consumer culture and this explosion of shopping malls and this expression of consumerism that even puts the western countries to shame,” he said.

But as China pulled away from its massive social programs in the 1980s, the Chinese started saving to pay out of their own pocket for retirement, education and healthcare, Schell added. Even though consumerism is booming on the surface today in China, conservative spending habits are deeply ingrained in the culture. Today China’s gross savings as a percent of GDP is 53% vs only 17% in the USA. In essence the savings rate in China is more than three times that of the US. Ergo, where to invest ones savings is a greater responsibility and daunting task in China.

Investment alternatives in China

Investment alternatives for Chinese savers is today severely limited. In past years real estate did well, but has subsequently reached the Bubble Bursting stage.  Moreover, interest paid on bank deposits for most of the proletariat (working-class) has been miserly at best (earning  a meager 2.5% to 3.0% in recent years).  And for the more sophisticated affluent classes, there is the Shanghai Stock Exchange (SSEC).  But whereas the SSEC provided a respectable yearly return from 1995-2007, it has since fallen on severely hard times…as this chart clearly shows:

Since its 2007 peak, China Stocks have declined a whopping -66%.  Moreover, if price support at 2000 fails, the SSEC could conceivably plunge to support at 1000 (equivalent to another heart-breaking plunge of about -50%).  Obviously, this dismal prospect  does NOT inspire Chinese investors with sufficient confidence to bear this potential risk with their hard earned savings.

So what’s left for Chinese savers/investors?  Emphatically…GOLD & SILVER, which are part of the ancient cultural heritage of the Sino nation.  The following Relative Return chart will soon galvanize the attention of investors in China. Since 2001 SILVER has appreciated a total of +376% vs a pathetic +8% for the Shanghai Stock Exchange.  Silver literally leaves the SSEC dead in the water.

China Silver Demand to Climb to Record

Silver’s growing demand in China, the world’s second-largest user (after the USA) is set to jump to record consumption as investors look to preserve wealth, according to Beijing Antaike Information Development Co.

Consumption may climb to 7,700 metric tons after gaining 6 percent to 8 percent in 2012, Shi Heqing, an analyst at Beijing Antaike, said in a recent interview. About 33 percent of the country’s demand comes from jewelry and coins, with the rest from industrial use in photography, solar and electrical appliances, according to Antaike, which has studied metals for two decades. It is noteworthy to emphasize that the current China silver demand is minuscule in comparison to China’s massive savings. 7,700 metric tons of silver valued at the current price of $22/oz is only $5.4 Billion…vis-à-vis estimated $4.6 trillion in total savings in 2010 (which most probably tops $5.0 trillion in 2014).

Investors in China are buying more silver as the second-largest economy slowed for a seventh quarter, exacerbated by a falling Shanghai Stock Index that is heading for a fourth straight annual drop.

 “Chinese investors want hard assets such as silver, especially when it’s cheaper than gold and requires less funding,” Shi said. “Many producers and investors have hoarded the precious metal in the form of ingots or unwrought silver.”

Chinese Demand for Silver

In light of China’s sheer amount of people (1.4 Billion population)…and the highest rate of savings worldwide vis-à-vis extremely limited viable investment alternatives, one can only imagine how much of a monumental price impact this will have on the silver market…once China’s savers become aware of silver’s investment performance since 2001.

Then you factor in Chinese demand for things silver is essential to make – cell phones, computers, batteries, silverware, solar panels and jewelry. China’s silver consumption already accounts for 70% of the global total of industrial use, and its middle class isn’t even close to reaching its spending and investment potential.

Based upon the rationale described above, China’s silver demand may go viral during the next six years…driving its price to $500/oz.  And if the Gold/Silver Ratio were to revert to its long-term 16 to 1 level, then gold would be fueled to about $8000/oz.  (Historical Note:  Since the 4th century B. C. until the last quarter of the 19th century – over 2,000 years, the Gold/Silver Ratio was 16:1)

A related analysis:  Silver Price Charts & Other Factors Say Now Is Time To Buy


Silver Price Prediction

Indubitably, the China Factor will be the greatest force in fueling the price of silver into orbit for years to come. However, another cardinal factor which may jump-start the silver price in the short-run is the imminent possibility of a Silver Short Squeeze. Here’s why:

Global silver mine production in 2013 was 815,000,000.  Accordingly, the value of that year’s silver mine production at $22/oz was $17.9 Billion. In this regard it is interesting to compare the recent Commitment of Traders Report (COT@02/18/14) showing there are 178,000 Silver Contracts SHORT…indeed an all-time high.  Each contract represents 5,000 oz of silver. Effectively, 890,000,000 oz are short, This is equivalent to more than an entire year’s silver mining production worldwide. One can only imagine how the silver price will go ballistic if and when the SILVER SHORTS ARE FORCED TO COVER.

A Must Read: Silver Short Squeeze 2

Internationally renowned precious metals analyst Adam Hamilton, aptly describes the explosive price nature of a large silver short condition:  “As all silver investors know, silver has always been an exceptionally-volatile metal.  3%+ price moves in a single trading day aren’t uncommon at all.  For SILVER SHORT SPECULATORS shorting at minimum margin (maximum leverage), silver merely rallying 10% wipes out 100% of the capital they risked!  And if silver keeps rallying, which is very likely once momentum shifts in its favor, they can lose far more than they initially bet.

And the greater speculators’ total short positions, the greater the risk they all face of a really big and fast rally erupting to wipe them out.  Once again the only way to close these shorts is to buy futures to offset them.  So as soon as a small fraction of speculators start buying to cover, silver’s price starts rising.  That convinces increasingly bigger fractions of the remaining traders to buy to cover, sparking a self-feeding frenzy cycle.

The more shorts who buy futures to cover, the faster silver’s price rises.  And the faster silver’s price rallies, the more pressure it puts on the remaining short speculators to close their positions.  That is why it is so exceedingly dangerous to be short when everyone else is.  Short covering can quickly become a FRENZIED stampede for the exits, with very few speculators getting out unscathed.  Their frantic buying creates a short squeeze.”  Consequently,  the super short squeeze will inevitably catapult the silver price into orbit. See Hamilton’s entire analysis in the following link:

To be sure this reveals the greatest potential for a massive short squeeze ever seen in silver’s entire secular bull history. Moreover, the impending Silver Super Short Squeeze will dwarf what happened in the latter part of 1979…when the white metal soared nearly 10 times from $5 to almost $50/oz in only 12 months. Furthermore (and for valid reasons given above)  China’s population with $4,600,000,000,000 (ie $4.6 Trillion) in savings…looking where to invest…may cause the price of silver to go parabolic.

Ergo, our silver prediction that the silver price may top $500/oz by the year 2020 is certainly plausible and rational.


Vronsky Archive:

The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.

Silver Phoenix Twitter                 Silver Phoenix on Facebook