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India Reacts to Depressed Silver Prices

Several recent articles have highlighted a surge of silver imports to India, prompting me to take a closer look. India has always been a big buyer of silver and gold, befitting the traditions and culture of the country with the world’s second largest population. The population of India, more than 1.3 billion citizens, is now only about 50 million less than that of China. Combined, both countries make up 35% of the total world population (7.7 billion) and have always been large buyers and holders of gold and silver. Together, India and China absorb close to 50% of total world gold and silver mine production. 

One big difference between India and China is that the gold and silver buying in India is largely a grassroots phenomenon, emanating from the general population due to deep-rooted customs and traditions; where the buying from China is predominantly from official sources (similar to the gold buying by Russia). To me, this makes the gold and silver buying from India more “free market” and price-sensitive in nature because the more participants in any market, the freer the market is by definition. The many tens and even hundreds of millions of gold and silver buyers from India make the markets there the freest of all.

India has always played a vital role in gold and silver. I remember how my longtime friend and silver mentor, Izzy Friedman, more than 40 years ago, as he was deciding whether to make a major investment in silver in the mid-1970’s, actually flew to India to see for himself if the stories of great silver hoards about to flood the market should prices move higher (from $4 or $5) were true. Izzy saw plenty of silver, but none so closely held in large concentrated quantities to pose a market threat. I believe that’s still the case today.

Indian gold and silver buyers are quite price-sensitive and unlike the typical buyer in the West, Indians tend to buy more when prices are low and less when prices are high. Gold and silver flows into India are one-way affairs – what flows in stays there, never to leave the sub-continent. Gold prices are closer to the highest they have been over the past 5 or 6 years, while silver prices are closer to the lowest they have been over that period, resulting in the silver/gold price ratio widening out to the highest it has been in 25 years.  I reviewed the import data from India over the past 15 years with that in mind. For silver, I relied on the Silver Institute’s World Survey and for gold, a straight Google search for Indian imports from 2004 to 2018.

Here’s what I found. The people of India, according to the import data, are buying more silver relative to gold than ever before. It’s not that gold imports are down sharply, it’s much more that silver imports are up sharply. I broke the data from the past 15 years into two segments – the 9 years from 2004 to 2012 and the six years from 2013 to 2018. As a reminder, by comparing the imports of gold and silver on a per ounce basis, all outside influences are neutralized, like currency and overall economic conditions. For instance, the great Indian demonetization of 2016, resulted in sharp declines in the imports of both gold and silver. That’s the objective beauty of making like-kind comparisons – it filters out peripheral issues.

For the 9 years 2004 to 2012, the silver/gold price ratio averaged 56 to 1 and India imported an average of 26.5 million ounces of gold and 85 million ounces of silver each year – or 3.2 times more ounces of silver than gold. Over the next 6 years 2013 to 2018, the silver/gold price ratio widened out to 73 to 1, with silver getting progressively cheaper relative to gold (except in 2016). Over the most recent six years, gold imports fell slightly to an average annual 25.2 million oz, while silver imports surged to 188 million oz annually, up 120% over the yearly average of the prior 9 years. Where imports of silver compared to gold in ounces were 3.2 times from 2004 to 2012, they jumped to 7.5 times from 2013 to 2018.

In the most recent full year of import data, 2018, India imported 24.4 million ounces of gold, the second lowest amount in 9 years, while silver imports were 224 million ounces, the second highest total in 15 years. The amount of silver ounces imported to India last year was more than 9 times the amount of gold imported, the highest level ever. The average silver/gold price ratio for 2018 was 82 to 1, the cheapest silver had been to gold in 15 years, so it’s not surprising that Indian buyers reacted as they did. Of course, while full year data is not available for 2019, the silver/gold price ratio has averaged 86 to 1 year to date, with very recent readings of 90 to 1.

Considering that the silver/gold price ratio has continued to widen out since 2018, exceeding 90 to 1, making silver even cheaper compared to gold, there is every reason to expect that India’s imports of silver have continued to grow, both on an absolute and relative basis compared to gold. What this means, aside from confirming the price-sensitivity (and good sense) of the Indian buyer, is that prices do have consequences. It’s often said that the cure for low prices is low prices because low prices discourage production and encourage demand.  The record of India’s silver imports would seem to be clear confirmation of that.

The main price consequence of the surge in silver imports to India is as a direct result of the COMEX price suppression and manipulation of the price. The collective investment reaction in the US and West to the low price of silver (or any investment asset) is not to buy – that’s our investment culture, for better or worse.  The collective reaction in India is markedly different and in a very real sense is the ultimate confirmation that silver prices have been manipulated; as what else could prove more conclusively that silver prices were artificially suppressed than the surge in demand from India?

In fact, had there been no surge in demand from India, that would be proof silver wasn’t manipulated in price.  What else could possibly explain the surge in silver demand from tens of millions of Indian buyers if not that they felt prices were depressed – not just on an absolute basis, but relative to gold as well? I’m not suggesting that the many millions of Indian buyers are at all aware of the COMEX price manipulation; they just know that silver is unusually cheap and undervalued relative to gold.

So here we have compelling new proof that silver prices have been manipulated – not that more proof was needed. By depressing the price of silver, JPMorgan may have succeeded in discouraging western investment demand and cornering the physical market for its own accumulation, but has also inadvertently stimulated Indian demand. As a result, a brand new Catch-22 has emerged in silver. As and when JPMorgan decides to let silver prices fly to the upside, it is reasonable to assume that Indian demand would fall off, but as that demand falls off, the higher prices will jumpstart western demand. If the right hand doesn’t get you, then the left hand will. Should JPM choose to prolong the silver price suppression, the imports to India should continue to surge and with the concurrent decline in world silver mine production, a physical crunch becomes inevitable. Prices do have consequences.

Ted Butler

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