Silver shines bright,to climb steadily

* Silver prices underpinned by investment demand

* Spot gold hits record high at $1,589.56 on debt concerns

* Monsoon key to Indian purchases

Despite a swoon following a 60 percent rally to a peak in April,silver continues to lead the precious metals complex with a gain of 24 percent so far this year,outstripping gold’s rise of 11 percent,and retains allure for inflation-wary investors.

Silver,notorious for its price volatility,stung many investors with a drop of 33 percent over six sessions in early May from a record of $49.51 an ounce on April 28.

Silver prices have held above $32 since mid-May,and are set to move higher in the second half of the year,supported by low interest rates in the United States,a sovereign debt crisis in the euro zone and inflation concerns in key emerging economies such as India and China.

Lingering fears of a sovereign debt crisis,inflationary pressures and a slowdown in the recovery continue to drive investors to look for a safe haven and hedge against uncertainty,said Ong Yi Ling,an analyst at Phillip Futures.

When gold hits a record high,investors will once again search for a cheaper alternative to gold,and silver may be the best candidate.

On Thursday,spot gold extended its winning streak to a ninth session,hitting a record top of $1,589.56 an ounce,while silver extended a rise of 5.6 percent from the previous session to $38.38.

NOT LOSING MOMENTUM ANYMORE

Phillip Futures expects silver prices to reach $43 in the second half of the year,while Barclays Capital expects prices to reach $40.2 in the third quarter.

Silver is looking reasonably good in the second half,as prices have been basing around $35,and is not losing momentum any more,said Mark Pervan,Global Head of Commodity Research at ANZ.

Trading volumes for silver on the Shanghai Gold Exchange,China’s flagship precious metals bourse,shot up to 2.257 million kg on May 13. While they plunged to 475,056 kg on July 13,that is still more than three times the average daily volume of 151,966 kg last year.

Obviously there is strong support at current levels from physical demand — mainly investment demand,a Tokyo-based trader said. Prices below $35 should be a comfortable level for people to buy.

The silver growth story will be underlined by continued Asian preference for the physical metal and rising demand for exchange-traded funds,analysts and traders said.

Physical silver bar hoarding will continue to gain momentum,because Asian,in particular Chinese,investors have a preference for physical rather than futures-based holdings in precious markets,said Pervan of ANZ.

The outflow from silver-backed exchange-traded funds is also likely to be coming to an end,and the possibility of rising ETF demand will further buoy silver in years to come,Pervan said.

ETFs let investors profit from price rises without owning physical material and have become popular among Western investors. Growth of such funds has helped gold prices take off,as the increasing holdings add to the demand for bullion.

The ETF story that has driven gold in the past four or five years is a new dynamic in silver,said Pervan.

Further build-up in silver ETF demand may be slightly more than what you’ll see in gold,a lot of which is driven by a lower entry point to precious metals provided by silver — it’s 1/40 of gold’s price,which is always going to be a trigger for small investors.

The gold-silver ratio,or the number of ounces of silver needed to buy one ounce of gold,dropped to a one-month low of 41.4,off its lows under 32 in late April when spot silver prices rallied to the record high.

IShares Silver Trust,the world’s largest silver ETF,rose more than 1 percent on the day to 9,633.95 tonnes by July 13,nearly 15 times the fund’s holdings at inception in April 2006.

The world’s biggest gold ETF,SPDR Gold Trust ,reported holdings at $1,225.41 tonnes,151 times its holdings when the fund was launched in 2004. It would rank No.6 on the list of the world’s top gold holders,right after France and ahead of China.

Silver prices in the second half will also hinge on a pickup in demand from India,the world’s largest bullion consumer and fourth biggest silver consumer in terms of fabrication demand.

A number of gold ETFs have attracted increasing interest from investors in India this year,but silver ETFs are yet to launch due to regulatory uncertainties.

GOOD MONSOON TO UNLOCK INDIA BUYS

Retail investors in India rushed to buy silver bars and coins during the metal’s meteoric rise early this year,only to rue their luck when the May rout shaved a third off the metal’s value. But dealers say good monsoon rains and bulging farm incomes could bring back buyers.

If farmers get good crops,certainly demand would rise from rural households,said Harshad Ajmera,proprietor of wholesaler JJ Gold House in the eastern city of Kolkata. The monsoon has so far gone smoothly and bodes well for rural earnings.

But silver imports will slow at least for the next month or two,coinciding with India’s monsoon season,which typically sees a lull in gold and silver buys as farmers focus on sowing crops. Rural areas make up 70 percent of India’s gold demand and more than 60 percent of its silver consumption.

I usually buy gold and silver jewellery at the time of the Diwali festival,said Vikram Patil,a 50-year-old cotton farmer from Jalgaon in India’s western state of Maharashtra,referring to the Hindu festival of lights,which usually falls in October.

If my earnings improve,I will invest more in jewellery.

SILVER-TRADE/FACTBOX – Silver trading in China and India

Robust demand from China and India helped ignite a record-setting rally in spot silver this year. Here are facts on duties and quotas on silver trade in the two countries,as well as silver’s use in various industries.

TRADE AND DUTIES IN CHINA AND INDIA

China has been a net importer of silver,including silver plated with gold or platinum,unwrought or in semi-manufactured or in powder form,since 2007.

In the first five months of 2011,China imported 1,659 tonnes of silver,down 24 percent on the year. Silver exports dropped 21 percent to 505 tonnes,official customs data showed.

China does not impose an import duty on silver,except a 10.5 percent duty on base metals clad with silver. But a 17 percent value-added tax is levied on silver imports,in comparison to an exemption of VAT on gold imports.

It does not impose an export duty on silver,but limits the amount of silver being exported. For 2011,Beijing handed out 5,670 tonnes of quotas,up 11 percent from last year’s.

India charges 1,500 rupee per kilogram on its silver imports. There is no duty on silver exports.

Indian imports in the past five years (in tonnes):

Year Imports

2010 3,029

2009 1,285

2008 5,048

2007 2,488

2006 532

(Source:GFMS)

USE:

Silver is used both as a precious and industrial metal.

Its electrical and thermal conductivity mean it is widely used in electronic applications,particularly in conductors,switches,contacts and fuses.

Silver use in the photovoltaic industry has grown rapidly,while demand for consumer electronics such as televisions and monitors using Plasma Display Panels and CD-ROMs has added to demand.

Silver is also used in photography,although demand in this sector has been declining due to the rise of digital photography.

Jewellery and silverware are traditionally key consumers of the metal.

Historically,silver was more widely used in coins than gold.

Following are tables of breakdown of silver fabrication consumption in different sectors in 2010,as well as top ten consumers,based on numbers from GFMS and the Silver Institute.

(mln oz)

Fabrication 878.8

Industrial applications 487.4

Photography 72.7

Jewelry 167.0

Silverware 50.3

Coins & Metals 101.3

Top ten countries in silver fabrication (million ounces):

United States 189.6

China 127.2

Japan 102.1

India 94.1

Germany39.6

Italy 35.2

Commonwealth of Independent States 34.9

Thailand 30.7

South Korea 29.9

Canada 21.4