Silver is the new safe haven in China

Silver prices climbed to a 31-year-high this month, hitting $42.69 per ounce, driven in part by Chinese demand Every market has a silver lining but China has a particularly thick one. Demand for silver has steadily risen in Middle Kingdom, but so far all the action has been out of the spotlight. Silver prices climbed to a 31-year-high this month, hitting $42.69 per ounce, driven in part by Chinese demand. In February, the country imported 245 tonnes of silver, even as 2010 saw record Chinese imports of more than 3,475 tons. This was a massive four-fold increase since 2009, forming an unprecedented 14 per cent of global silver. The country shows every sign of topping the import craze this year too. Silver is the new safe haven and newer uncertainties will continue to create more physical demand in China. This has only been exacerbated by the geopolitical risks and the ecological disaster in Japan. The Chinese have been openly accumulating gold for nearly a decade, but its silver stockpile is silently going up. Several trends are visible. Until 2009, China has been a net exporter of silver. In the first eight months of 2010, Chinese silver exports declined 60 per cent, due to several factors: increased investment demand from the Chinese people, hoarding for industrial use by Chinese businesses and accumulation by the central bank. The export market may be reduced to zero in 2011. Inflation hedge China is now the world's third largest silver miner after Mexico and Peru, and the world's largest refiner. Yet, it remains deafeningly quiet about its silver investments in the last few years. China has been continually accumulating dollars for years as the unintended consequence of its large trade deficit with the US. They are always looking for new outlets to unload or invest their kitty. The Chinese State Administration of Foreign Exchange which manages nearly $3 trillion of currency reserves, says, it can no longer afford to invest in US Treasuries or EU debt and are left with only two alternatives into which they could sink a large amount of money: Gold and silver. Although not yet a substitute for gold, demand for silver is growing from China, even though it gets more expensive. However, central banks and sovereign wealth funds, which have massive exposure to the dollar, have stayed mum about their diversification plans into gold and silver for fear it could lead to a surge in bullion prices. Simultaneous positions There has been growing speculation for some time about Chinese silver buying behaviour, especially with them concentrating on taking physical deliveries of silver. Silver is crucial not only for its monetary value as inflation hedge, but also its industrial value. The white metal is a key component for many high tech goods produced in China in the automative and electronics sectors. With the commodity getting scarcer and more expensive in the coming years, the Chinese need a ready supply of silver to dominate the world market in flat panel televisions, cellphones, computers, hybrid car batteries and solar panels. Little surprise that they have been taking simultaneous long and short positions on the Comex in New York. Analysts say the Chinese have indulged in long buying silver on the Comex, while simultaneously shorting silver on the exchange; taking delivery and settling those contracts in cash. Even if they took a loss on all their shorts, they would still be steadily accumulating physical metal. So even though they may be acquiring the physical silver at a higher than market price, they can still prevent panic behaviour on the Comex. Also, the Chinese are well aware that if they were to drive up the price of silver by directly buying large quantities on world markets, they would crash the dollar and euro, hurting themselves in the short run. Silver is not is a significant part of most countries' reserves, but China is an exception. Since Imperial times it used a silver standard rather than a gold standard, and so retained substantial reserves. Even now, it uses silver as an instrument to reduce money supply growth and buffer people from crisis. In September 2009, the Chinese government publicly encouraged people to buy silver in the form of small-value ingots which could be readily negotiable, just in case a banking crisis occurred in China. From : Gulf News