PRICE of silver has jumped in the last year from Rs 28,000 to Rs 55,000 per kilo. Purchase of gold and silver is considered good way to store wealth. Often people think of Fixed Deposit in banks to be safe. It is not so. Value of a FD declines as price rises. Say you have deposited Rs 100 in a FD in a bank today. Rs 100 will buy 3 kilo of sugar today at Rs 33 per kilo. Now, the bank returns Rs 106 to you one year later after adding interest. But, say, the price of sugar has shot up to Rs 53 in the meantime. As a result, you will be able to buy only 2 kilo of sugar with the same money after one year. In other words, you deposited 3 kilo of sugar in a FD but got only 2 kilo in return. The increase in price has eaten away the value of your FD. Such erosion of wealth is less likely in the purchase of gold and silver. Historically, it is seen that their price increases along with the general price level in the economy and the investor is not put to loss.
Gold and silver have become particularly attractive at present. America and Europe occupy dominant position in the world economy today. Investors like to invest their wealth in bonds, shares and properties of these countries. These economies are in trouble today. American Government is incurring a huge budget deficit. This borrowing is expected to lead to a decline in the value of the dollar. European Governments are also getting mired in debt as seen in the problems of Greece, Ireland and Portugal. Global investors are hesitant to invest their wealth in these countries because the value is likely to decline. They are buying gold and silver instead.
The increase in price of precious metals is partly offset by an increase in production. The farmers begins to cultivate barren lands to grow bajra and ragi if prices are high. The rickshaw puller is willing to go over bad roads if the passenger offers more money. Similarly mining companies are willing to extract gold and silver from mines having low content of metals if prices are high. This increase in production puts a stop on further increase in price. Say, the cost of extracting a kilo of silver from a substandard mine is Rs 50,000 per kilo. The mining company may start production from this mine if price increases to Rs 55,000 per kilo. Production from this mine would prevent increase in price above this level. However, this production cannot lead to reduction of price below Rs 50,000. The company will shut the mine if price in the market falls below this. Therefore, price of precious metals is likely to move upward despite increased production from new mines. Moreover, the impact of increased production will be seen after a gap of 5 to 10 years. It takes time to identify the mines, start mining and to establish factories to extract metal from the ore.
The price of silver is likely to move faster than gold. Gold is used almost wholly for investments. Its other use in jewellery is, in part, for investment. Gold is not used much in production of goods. Silver, on the other hand has many uses. It is used in manufacture of colour printers, photographic films and paper, bandages and tooth brushes and computer key boards. It is used in treatment of water and skin diseases and purification of air. Silver is a natural killer of germs. As a result demand for silver is growing from two sources-investors as well as industrial use, while demand for gold is growing only from investors. The industrial demand for silver is likely to increase as the standard of living of people of the world improves and demand for goods like colour printers increases.
Supply of silver, on the other hand, is shrinking. The yearly global consumption of silver is 800 tons more than production. This shortage is being met from the silver reserves of the yesteryears. The global stock of silver was about 10 billion ounces in 1940. It has declined to one billion ounces today. The global stock of gold, on the other hand, has increased from one billion ounces to five billion ounces in the same period. Reason is that the current production of gold is mostly added to the stocks. Very little gold is consumed. But current production of silver is inadequate to meet even the current consumption hence stocks are getting depleted. The depletion of stocks along with increase in industrial demand is likely to lead to increase in the price of silver.
The demand of silver for consumption maybe somewhat moderate due to the recessionary tendency in the developed countries but this reduction will only wipe out a fraction of the deficit. The increase in investment demand will increase and more than make up for the fall in demand for consumption. The overall scenario for silver, therefore, looks positive.
Historically the price of gold has been about 10 to 15 times that of silver. This changed dramatically at the end of nineteenth century. New silver mines were discovered in Northwest United States. This led to a huge increase in supply. The price of silver fell. Gold began to be sold about 100 times the price of silver. Price of silver has been inching up slowly since then. Presently price of gold is about 40 times that of silver. 10 grams silver costs Rs 550 while 10 grams gold costs Rs 21,000. Analysts are of the view that price of silver will continue to increase and it may stabilise at the historical rate of one-tenth of gold. Accordingly a fourfold increase in the present price of silver may take place.
Prices of silver had increased in the eighties just as they are increasing presently. The price of silver in the international markets had reached a high of 50 US dollars per ounce in 1980. It fell to mere 4 dollars in 2001. That increase was due to accumulation of silver stocks by Hunt Brothers. It was entirely due to their speculative activity. Hunt Brothers went broke and the prices collapsed. It is possible the speculators are similarly pushing up the price of silver at present. No one knows. However, this does not cancel the increase in price that is taking place from three sources: one, increased investment demand due to weakness in the western economies; two, increase industrial demand due to improvement in the global standards of living; and three, production being less than current consumption. Due to this the price of both metals is likely to move upwards-more of silver than of gold.
(Author’s address:bharatj@sancharnet.in)
Leave a Comment