View Full Version : China demand for Silver

7th December 2010, 03:38 AM
A bit of an old article but still an eye opener with regard to the current and future consumption of the Silver in China.


China and India – The Inside Story How does China affect the silver price?
China is encouraging its citizens to purchase or increase their purchase of gold ands silver holdings. The Chinese government is promoting this and the move could have a major impact on the bullion market. If 1.3 billion Chinese citizens start purchasing gold and silver then even if it is in tiny quantities the effect on the bullion market is expected to be huge.

Another fact that highlights the interest of China in the bullion market is that China’s investment in gold has risen by 50% in the recent years and the country is the second largest gold investor behind India. China has also introduced its first ever investment opportunity for silver and has also signaled a total relaxation of restrictions on individuals holding precious metals by the Chinese authorities.

Every bank in China will now be selling silver and gold bullion bars in four different sizes to individuals. Another factor that could impact silver prices is the sheer amount of population in China coupled with the savings rate in the country. Silver is also used to make mobile phones, batteries, computer, silverware and jewelry.

Demand for these goods in China is high and is rising continuously with the rise in population which currently stands at more than 1 billion. Silver consumption in China accounts for around 70% of the global total of industrial use and the Chinese middle class has not yet reached close to its spending potential. And the ways of Chinese government to boost public spending on bullion could add support to silver prices in the coming years.

Factors that could add to upside in silver prices

• Supply of silver is declining
• The white metal remains undervalued
• Rise in investment demand
• Rise in industrial demand

Supply of available silver is declining and it has dropped 86% in the past two years. The current amount of above ground refined silver has fallen from 2.2 billion ounces in 1990 to less than one billion today. But demand for silver as an industrial metal is rising, this is a positive factor as this will support a rise in prices and will thereby lead to higher investment demand in the commodity.

The white metal remains undervalued on a historical basis and is undervalued even against gold prices. But silver prices could rise phenomenally in the coming years as the metal is not only used as a precious metal but it also finds application in industrial demand. Investment demand for silver has risen in recent years as investors concerned about the value and safety of their investments allocated their funds to silver and gold. Moreover, there is increasing concern over the value of paper currencies which is leading to further diversification into hard assets and precious metals.

Fundamental Outlook

For this year, key driver of new market places for silver will be demand for silver-zinc batteries in ‘smart automobiles’ and an array of portable electronic devices. The widespread adoption of silver-zinc batteries is going to be one of the major drivers behind the rise in prices as it may absorb high quantity of silver. But this demand may not pick-up instantly in this year but will surely become a sizeable marketplace for the commodity.

China is expected to become a huge adopter of electric cars to curtail its rising dependence on oil and to reduce air pollution. Further, silver-zinc batteries are destined to generate major market share as they are much safer, environment friendly and far more efficient than lithium-ion batteries.

The ever-expanding industrial market for silver includes LCD/plasma television screens, solar panels, and water purification, medical and superconductivity applications. Silver is also finding a critical new use in biocides where the white metal is used in chemical agents to kill dangerous bacteria.

It has the qualities of a precious as well as an industrial metal, unlike gold. Though investment demand in the case of gold had pushed gold prices higher in 2009, silver has been luckier as demand from industries provided additional support. Demand for silver in this year is expected to rebound to normal levels as the emergence of key new markets for silver would help to boost prices further.

Also re-stocking of inventories for more of silver’s traditional uses will be a powerful demand driver in the near-term. Silver’s importance has grown as a high-tech industrial metal and it has grown year on year since 2001 to the start of the financial crisis. This long-term trend in silver prices is set against a backdrop of a multi-year rally. We expect silver to continue to trade higher in this year on the back of demand-supply dynamics.

We feel that silver is a unique metal in terms of performance as it wins whether the economy is in good or bad shape. Demand for the metal rises in both situations because if the economy improves then the industrial demand increases and if there is a downturn then investors buy it as a hedge against the downturn in the economy.

We expect silver to witness a bullish phase as new avenues of demand open up amid the existing traditional applications of the metal. We also expect investment demand along with industrial demand to drive silver prices higher in the coming years.