After outperforming pretty much every asset class, most certainly stocks, and even gold, year to date, the “poor man’s gold” may surge even more. The reason: China may cut silver exports by as much as 40%. As Bloomberg reports: “Shipments may decline from about 3,500 metric tons in 2009, said Feng Juncong, chief analyst at the state-owned Antaike, without providing a specific forecast. Customs data show exports plunged almost 60 percent to 970 tons in the first eight months. Cancellation of an export rebate in 2008 is also hurting shipments, she said.” This is in line with recent expectations from the World Gold Council which has previously stated that China will likely become an increasingly greater buyer of gold both institutionally and at the retail level. And while we have discussed the impact that China’s (temporary) ban on exports of rare earth minerals will have on prices (hint: not down), this will also end up driving silver prices higher. The catalyst, as usual, inflation: “There are Chinese investors now hoarding silver, along with other resources, amid anticipation of higher inflation. China is short of resources so these investors believe the metals will be more valuable in the future.” These investors are correct.
More from Bloomberg:
Reduced exports may bolster prices that are trading near a 30-year high on speculation that governments worldwide will take further steps to stimulate their economies, weakening currencies and increasing demand for assets that are a store of value. China, the third-largest producer after Peru and Mexico, revoked export rebates in August 2008 to curb use of natural resources.
“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East.”
“China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said.
China’s silver production, including mined, by-product output and recycled material, grew by an average 14.9 percent every year in the 20 years since 1990 to 10,348 tons in 2009, Feng said. Growth was mainly because of the fast-growing production of lead, zinc and copper, which generates silver as a by-product, Feng said.
The country’s silver output dropped 1.9 percent in the first eight months to 7,445 tons, she said. About 60 percent of China’s silver mined output is in the form of by-product of base metals, according to Antaike estimates.
The one natural better seller in the silver axe has long been JPM. The question of how the bank will cope with an increasing demand of investors for physical, as well as overall rising prices and creeping margin calls to its trading desk so far remains unclear. We were not surprised that none of the analysts on the conference call asked the question: after all, they are all in the same boat. It is also not surprising that there is an increased selling pressure on gold today, which even with the DXY and stocks reclaiming yesterday prices, remains at largely depressed levels. Some more skeptical observers believe the whole action over the past two days was merely enacted to break the very tight (and higher beta) correlation that PMs had exhibited vis-a-vis risk assets. So far, it is succeeding.