Gold News

Indian Monsoon Could Hurt Silver Prices

Disappointing rainfall could leave farmers with less money to buy silver...

A GOOD monsoon tends to be good for the Silver Bullion market in India. But this year's monsoon has stalled for more than two weeks here, writes Shivom Seth in Mumbai for MineWeb.

This leads to worries that the patchy rains may push prices of essential commodities ever higher, leaving little money in the hands of the farmer to buy precious metals like gold and silver.

Sales of precious metals typically rise when rains are bountiful, with farmers preferring to park their money in gold and silver ornaments when they have a bumper farm output.

With the country consuming over 3,000 tonnes of silver annually, silver is considered a hedge against inflation in rural India. Far more affordable than gold, it is purchased by small families in the form of jewelry, while more wealthy farmers prefer to buy Silver Bars.

Traders note that farmers tend to bury the Silver Bars in their fields along with the crops. If there happens to be a bad monsoon, the silver is dug out of the ground and is looked on as the harvest. 

"Silver coins and bars have a very significant meaning to the rural community. We know of farmers who buy silver bricks in several kilos and lay them at a not-so prominent spot in their field, praying for a good harvest,'' said Tanna Ghosal, a bullion dealer who has retail outlets in rural Maharashtra. 

He added that these silver bricks are rarely recycled, though a good harvest would ensure that more bricks are bought at the nearby jewelry store.

Even as the Indian government is banking on adequate rains to offset losses from the 2009 drought, which was  the worst in three decades, and also to curb food inflation by keeping crop-rescue plans ready, the forecast of "normal rain'' by the Met Bureau has gone awry.

"With the monsoon setting in two days early before its appointed date, one was looking forward to good rainfall. However, many states in North India have had no rain this last week and some parts of central India too went without rain. This is not a good sign for commodities in general and for precious metals, in particular,'' said bullion analyst Mahesh Sonawane, bullion analyst in a note to his clients.

More than 60% of the farmland in India is rain-fed and depends on the June-September monsoon period. Sonawane said if rains were below normal, "then gold demand would not exceed 650-700 tonnes this year.''

India, the world's largest consumer of gold, bought some 930 tonnes of the yellow metal in the fiscal year ended March 31, 2011. More than 70% of India's gold demand comes from rural buyers, mainly comprised of the farming community.

But the silver story appears to be on a slide, not just in India, but in the global markets as well. Even as speculators cut their net-long positions in 18 US commodities by 15%, silver traders cut net-long positions by 17% from a week earlier to 15,998 contracts, according to the US Commodity Futures and Trading Commission. The metal slid 2.7% last week.

In India too, many retail investors are said to have lost their shirt during the 33% crash in the first quarter of the financial year. The import figures for silver paint a sorry picture. 

In April, the country imported 400 tonnes of silver and in May, this halved to around 200 tonnes. Till June 15, silver imports were nil. In 2010, India consumed about 2800 tonnes of silver.

"Normal monsoon not only augurs well for the Indian agriculture sector but also generates a bullish scenario for silver, as out of total demand for the white metal in the country, 60% is contributed by the farming community,'' said Kamlesh Shah, futures analyst with a broking firm. 

Commenting on the overall mood of the commodities market, Shah said demand for gold and silver slipped by around 2% to 2.5% through last week. Moreover, from the beginning of the year, Silver Prices have appreciated more than 75%, which could have also dulled demand.

"Several fund houses were busy accumulating the silver metal,'' said Mukesh Kothari, director of RiddiSiddhi Bullions, commenting on the unusual price rise. He added that the staggering rise of Silver Price had waned as the CME raised initial margins for silver within quick succession from $16,200 to $21,600, effective May 9, 2011. 

"Speculators are bound to unwind their positions. And late monsoons are not helping the situation,'' he added.

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

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