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Why you should buy your wife a silver spoon than a gold bar

Sagar Salvi & Riken Mehta, MoneyControl, 10/4/2012

source: http://www.moneycontrol.com/news/market-edge/why-you-should-buy-your-wifesilver-spoon-thangold-bar_690597.html

"Buy yourself some silver chopsticks or some silver cutlery…you will be very rich in 5 or 10 years." Well, that was investment guru Jim Rogers’ call at the start of 2011. Rogers is chairman of Rogers Holdings. 

In 2011, however, silver prices remained somewhat flat as oppose to 2010, when prices surged 77%. Last year, though inflation had remained high, commodity prices could not take off due to government’s all out efforts to rein in inflation. In addition, absence of the much-anticipated QE3 from US Federal Reserve Bank has taken the sheen off precious metals further, especially in the short-term.

Nevertheless, a strong bullish case can still be made for silver over the long-term (read: next 3-5 years) on simple demand and supply factors. A major underlying aspect, which will drive up silver prices, is its industrial uses. In some cases, the widely used raw material cannot be recovered, which makes it that much dearer.      

Moreover, we do not have an alternative to gold and silver for now.

Gold Vs Silver

Silver performed much better than gold in 2010 with prices rising by an astounding 80% which is two and half times the rise in price of gold. Along with being deemed a safe investment, the relatively low supply of the metal as compared to the high demand has also contributed to the steady increase in price. In the first three months of 2012, silver price increased at a steady 13.9% compared to gold’s 4.8% jump. Historically silver has outperformed gold year-after-year, with a high risk-reward ratio.

3 scenarios when Gold/Silver rally

1) When US dollar (dominant currency) declines, gold and silver prices see moderate gains-inverse correlation.

2) When US dollar strengthens, rupee falls, which leads to firming up of gold/silver prices domestically.

3) When demand for precious metals rise due to festive/social demand, prices escalate.

Recently, China has outpaced India in terms of gold consumption. So there is a fair chance that even if the US economy comes out of its recessionary-type situation leading to a stronger dollar, the growing Chinese consumption may keep prices of precious metals up.

Gold-Silver ratio

To better understand the potential for rise in silver prices, we need to take a look at the gold-silver price ratio. For most of the nineteenth century, the white metal traded at a ratio of 15.5:1 (in USD terms).

Over a century or so the mean gold-silver ratio has been 45.69 :1  and at present the ratio is 52:1(Gold price/Silver price)

Based on this assumption, here’s how gold-silver ratio pans out at various gold prices.

If Gold prices touch USD 10,000 per ounce, then silver price may touch USD 192, USD 222 and USD 645 per ounce with respect to Gold-Silver ratio of 52:1, 45:1 and 15.5:1. The above table indicates that silver is currently undervalued compared to gold and is in a position to generate returns substantially greater than investing in the yellow metal.

However, this is not a bearish indicator for gold, but a strongly bullish sign for silver. Even if gold prices were to fall by 20%, and even if silver assumed a 20:1 ratio instead of 15.5:1, this would still mean silver will rally more than 100%  from its current price.

Therefore, it makes sense to stock up on that silver cutlery your wife always wanted!

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Tina Edwin, Economic Times 25/3/2012

source: http://m.economictimes.com/markets/commodities/how-too-much-gold-is-a-drag-on-indias-economy/articleshow/12395863.cms

The India-gold love affair is now facing a close scrutiny from the government. The budget has doubled import duty on bullion and non-standard gold to 4% and 10%, respectively, and slapped a 1% cess on unbranded jewellery. FM’s message is clear: reduce gold’s allure and head off Indians to other investments. For, too much gold is a drag on India’s economy. Here’s how:

The BIG Hoard – 20,000 tonnes

According to the World Gold Council, that’s approximately how much gold you’d find if you put together the store of individuals, institutions and the RBI at the end of 2011. Of this, 933.4 tonnes were added last year. Valued at Rs 27,000 per 10 grams, this stockpile is worth roughly Rs 54 lakh crore, 60% of the nominal GDP of India in 2011-12. Only a fraction, about 557.8 tonnes, is held by the RBI and constitutes 10.5% of India’s forex reserves.

But We Don’t Use Most Of It

2:1 is the ratio of gold to gross domestic capital formation. Had Indians bought more goods and services instead of gold, capital formation (economists’ term for fresh investments) would have been higher than Rs 26.92 lakh crore for 2010-11. How? Higher demand would push companies to expand capacity or invest in greenfield projects to build some items they currently import.

And Gold Doesn’t Work On Its Own

6.8:1 is the approximate ratio of the value of gold holdings to financial savings of households. Investments in financial instruments such as fixed deposits, insurance and equities release funds for productive activities by both the government and corporate sector. Gold does nothing but idle in safes or bank deposit boxes.

Yet, even though gold prices soared, household purchases did not decline proportionately. Instead, financial savings took a hit, falling to Rs 7.68 lakh crore in 2010-11 from `8.35 lakh crore in 2009-10. Inadequate banking infrastructure is to blame too: most of rural India cannot access financial instruments and has no choice but to buy gold as savings.

Plus, Gold Saps Precious Resources

Gold is the third largest component of India’s import bill beaten only by crude oil and capital goods. Crude keeps the economy running and capital goods help produce other goods, build infrastructure and keep growth rolling. But gold’s contribution to the economy is minuscule. Yet we spent $33.9 billion in 2010-11 to meet 92% of the gold demand. This year, the bill is likely to inflate to $58 billion, according to estimates of the Prime Minister’s Economic Advisory Council (EAC).

Gold Also Further Skews Numbers That Matter

Gold Imports as a % of GDP
1.7 in 2008-09
2.1 in 2009-10
2.0 in 2010-11
3.1 in 2011-12

12% is the estimated proportion of gold in the current year’s import bill of $479 billion. The trade deficit is likely to be $175 billion. If we imported less gold, the trade deficit would be less ugly. As a result, the current account deficit would have looked better and reduced depreciation pressure on the rupee. Import of gold also leads to imprudent use of foreign exchange earnings. A Macquaire Research report says the country’s net gold imports widened the current account deficit by 40 to 130 bps between 2007-08 and 2010-11.

So Will Import Duties End India’s Love Affair With Gold?

Unlikely. The World Gold Council believes there may be a very short-term impact on demand. In the long run, this increase will not matter. This is because the fundamental reasons for buying gold jewellery, rooted in Indian culture and weddings, remain unchanged. The demand for gold as an investment, driven by the need to protect against inflation, ease of liquidity and as a monetised asset to secure loans, will also be unaffected.

Some shining factoids

557.75 tonnes – Is RBI’s gold cache. Of this, 265.49 tonnes are held at Bank of England and Bank for International Settlement.

300% - Is the increase in gold holding of ETFs between 2009 and 2011. Now the stockpile is about 30 tonnes.
0.47 grams – Was India’s per capita consumption of gold jewellery in 2011.

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Silver may continue to outperform others

Hindustan Zinc to benefit as silver will contribute 20 per cent to its margins next year

Rajesh Bhayani & B G Shirsat, Business Standard 22/2/2012

source: http://www.businessstandard.com/india/news/silver-may-continue-to-outperform-others/465371/

Silver has displayed a smart rally in the current year so far, rising 21.2 per cent from January onwards. And, there are indications it would continue to outperform other metals like gold and copper. This would be good news for India’s largest silver producer, Hindustan Zinc, as the metal is likely to contribute 14-20 per cent to its Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.

Barclays Capital’s commodity outlook says: “The current profile of our price forecast suggests precious metals would be the strongest sector in 2012. We expect silver to reach $38 and rise even further in the third quarter of 2012, before profit booking sets in. At present, it is in a consolidation mode.”

Barclays says physical demand has been driving silver for the past few weeks.(Click here for graphs)

Following record gains in silver in late 2010 and early 2011, prices crashed towards $25. Since then, they have rebounded to $33-36. Currently, silver is facing strong resistance above $34.5 and getting support at $32.5.

Technically, we could see one more quick dip below $30. However, a decline to $25 or lower may not happen anytime soon. Silver is currently facing resistance at the critical level of $35. If it breaks to the upside, it will quickly climb to challenge the $50-mark once again and reach a high between $55 and $65 by the end of the year, technical analyst Jason Hamlin of Gold Stock Bulls says in his technical analysis.

Indications available from ratio trading suggest silver has outperformed gold, copper and crude oil since the beginning of January. The gold-silver price ratio has fallen from 56 to nearly 51 now, indicating silver outperforming gold. Similarly, crude silver ratio has come down from 3.86 to 3.57 and that of copper-silver has gone up from 118 to 129 now. Both these ratios indicate silver has done better.

As for safe-haven demand, silver traditionally tracks gold, while crude oil and copper reflect the economic scene and demand. Silver has heavy industrial use, so it tracks industrial activity, too. Whatever way economic demand moves, silver looks set to benefit.

Industry sources say, “Silver saw a high of $49 last April and has been in a consolidation mode since then. The consolidation phase for silver has lasted longer than for any other metal. Now, it should do well.”

Hindustan Zinc will be a major beneficiary of the metal’s surge, as it is the largest producer of silver in India. The company is expected to produce 250 tonnes of the commodity in the current financial year and is likely to raise its production to 500 tonnes in 2012-13.

Angel Broking senior research analyst Bhavesh Chauhan says, “Even if we take the conservative estimate of 400 tonnes and a price of Rs 50,000 a kg (which is 12 per cent lower than on Tuesday’s price), silver will contribute 20-24 per cent to Hindustan Zinc’s Ebidta margins.”

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Silver price may surge to Rs 1 lakh per kg

http://www.businessstandard.com/india/news//silver-price-may-surge-to-rs-1-lakh-per-kg//158561/on

The price of silver could surge to Rs 1 lakh per kg mark this year in the wake of international economic situation, Bombay Bullion Association (BBA) on Tuesday said.

"The silver currently ruling at Rs 57,000 per kg, is likely to go up further and might go up to Rs 1 lakh per kg this year due to the global economic crisis," BBA President Prithviraj Kothari told reporters here on the sidelines of a function.

The prices of silver in India have more than doubled in the last two years. This will affect silver imports, which may witness only marginal growth to around 5,000 tonne this year compared to about 4,800 tonne in 2011, he said.

"In 2011, we imported about 4,800 tonnes of silver, which was 70% higher than that of 2,800 tonne during 2010. This year the silver imports may be around 5,000 tonne," Kothari said.

Talking about gold, Kothari said, gold imports are likely to be similar to that of last year. India had imported 966 tonnes of gold in 2011, according to the World Gold Council report.

Gold prices are likely to move in the range of Rs 26,000-35,000 per 10 grams this year due to the current economic crisis, he said, adding internationally gold is likely to be traded in the range of $1,600-2,200 an ounce this year.

Talking about platinum, Kothari, who is also the director of RiddhiSiddhi Bullion, said he expects the prices to rise more than gold. In the international market, gold was trading at $1,740.88 an ounce and platinum at $1,670.50 an ounce today.

India annually imports 10-15 tonnes of platinum which is mainly used in the auto industry.

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Economic Times, 14/2/2012

source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/why-commodities-are-must-in-your-portfolio/articleshow/11879413.cms

The year 2011 was all about rising costs and expenses. This year is no different either. The liquidity-driven rally in 2012 so far has pushed up the prices of commodities such as zinc (11%), copper (8.78%), Dubai Crude oil (7%), gold (10%) and silver (21%) in US dollar terms. Firm crude oil prices pose a key risk as it can push up the inflation numbers further in India, as crude oil is the largest item on the import bill.

"India is a commodity-deficient country and a rise in commodity prices can push stock prices downwards. Also, a low correlation between commodities and equities makes commodities a good diversification option for investors. Hence, investors should have an exposure to commodities," says Arvind Bansal, vice-president and head – Multi-manager Investments, ING Investment Management India.

Though many agree on the importance of commodities as an investment option, inadequate information and limited options in this space make many investors ignore commodities. But the schemes launched by various fund houses investing in the ‘commodity theme’ make a good entry point.

Commodity Funds

Indian mutual funds cannot take direct exposure to commodities, keep aside gold. These schemes invest in commodities-related companies such as metals and oil, in India or abroad. You can choose among the schemes that invest in ‘energy’, ‘agriculture’ or ‘mining’ verticals. Each such fund, dedicated to a particular sector or theme, will help investors to invest in companies that mine, manufacture, process commodities or manufacture inputs such as equipment for commodities mining and processing.

In case of agriculture, fund managers focus on companies that manufacture agriculture inputs such as seeds, fertilisers, equipment. The rationale behind this logic is that these companies will clock profits whenever the underlying commodity prices see a spike.

To choose winners when the tide turns in favour of commodities, one can look at MF schemes that help investors pick and choose companies in this space, both in India and overseas. "Investors should invest 5-15% of their equity allocation in such funds with 3-5 year time frame," adds Bansal.

"Most of these funds relate to international commodity stocks either through the direct or feeder fund route. The one-year performance of most of such funds has ranged between 15% and 36%. Even within these, it is primarily the gold feeder funds which are more prominent," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.

Of course, the ride may not be absolutely smooth. You are exposed to risks such as a price correction in underlying commodity, a poor sentiment in stock markets and of course currency risks as you are investing in a global environment.

Gold

There has been a rally in gold prices and industry experts are still bullish on the yellow metal. In 2011, gold delivered a return of 10.72%. Though purchase of physical gold makes many comfortable, gold exchange-traded funds (ETFs) are gaining momentum with Rs 9,201 crore invested in gold through the ETF route due to factors such as ease of transaction, efficient taxation and safety. Units of gold ETFs typically track the gold prices of half or one-gram of gold, as the case be.

"The main driver for gold is the expectation of the continuation of loose monetary policies and quantitative easing from central banks in the developed world," says Chirag Mehta, fund manager – commodities, Quantum Mutual Fund. The currency debasement is expected to push up the gold prices further as investors would prefer to protect their purchasing power.

"An individual should have 10-20% of his portfolio in gold, depending on his risk profile," adds Chirag Mehta. Of course, to invest in a gold ETF, you need a demat account. But if you don’t have one, you can still look at gold fund of funds, where an investor doesn’t require a demat account. Gold fund of funds encourage small-ticket retail investors as the minimum amount is only 5,000 and you have the flexibility of opting for SIP (systematic investment plan) or STP (systematic transfer plan).

"Gold fund of funds are costlier by at least 0.5% because of the AMC set-up. Hence, investors who have demat accounts should opt for Gold ETFs and investors who don’t have demat accounts can opt for gold fund of funds," says Swapnil Pawar, chief investment officer at Karvy Private Wealth.

E-gold and E-silver

"E-gold, an initiative by National Spot Exchange, is the best form of investment in gold. The biggest advantage is the transparent pricing and lower costs compared to other forms of gold. The second option is Gold ETFs, which attract a fund management charge of 1%," says Rishi Nathany, CEO, Dalmia Securities. Silver as an investment option has been in the limelight for a couple of years now.

Like gold, experts have been bullish on silver due to the ever-increasing demand for industrial use. "Although there has been a lull in the industrial sector in the developed economies, it will only pick up from here. Also, the developing economies look vibrant, which implies an increase in the industrial activities, and hence, higher consumption of silver," says Pawar.

Like e-gold, you can buy e-silver from the National Spot Exchange to avoid physical silver. "Undoubtedly, commodities as an asset class look very promising. But it can only be a good component of your financial portfolio. The core portfolio, however, should comprise diversified, large-cap equity funds," says Suresh Sadagopan, certified financial planner & Founder, Ladder 7 Financial Advisories.

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