Analysis of the Price and Future Outlook of Silver in India. (2020)

1. MITTAL SCHOOL OF BUSINESS
FIN-210
CA-1
Name of Faculty: Mr. Vishal Goyal
Submission Date: 21/03/20
Submitted by: Amal Varayil
Registration no.: 11710974

2. SILVER
INTRODUCTION
Silver is a chemical element found in the Earth's crust in the pure, free elemental form as an
alloy with gold and other metals. Silver has long been valued as a precious metal. It is used
in many bullion coins, alongside gold. It has the highest electrical conductivity of any metal
and is, therefore, a highly valuable substance. In many global cultures and religions, silver is
used in traditional ceremonies and worn as jewellery during important occasions.
Silver is a brilliant grey-white metal that is soft and malleable. The mining of silver began
some 5000 years ago, with the first mine being in Turkey. Just over half of the mined silver
comes from Mexico, Peru, China, and Australia, the four largest producing countries.
Primary mines produce about one-third of the world silver, while around two-thirds come as
a by-product of gold, copper, lead, and zinc mining. The top three silver-producing mines
are Cannington (Australia), Fresnillo (Mexico), and San Cristobal (Bolivia). In Central Asia,
Tajikistan is known to have some of the largest silver deposits in the world.
Silver has innumerable applications in art, science, industry and beyond. At the highest level,
though, demand for silver breaks down into three important categories: silver in industry,
investment, and silver jewellery and décor. Together, these three areas represent more
than 95% of the annual silver demand.
Silver is characterized by their quality and been divided into various grades. Some are:
1. Fine .999 Silver
2. Sterling .925 Silver
3. Argentium Silver and Non-Tarnish Alloys
4. Coin Silver
5. Nickel Silver
6. Tibetan or Tribal Silver

3. USES OF SILVER
Silver, the white metal, has an illustrious reputation for its use in jewelry and coins, but
today, silver's primary use is industrial. Whether in cell phones or solar panels, new
innovations are constantly emerging to take advantage of silver's unique properties.
Some uses of silver are:
1. Jewellery
One of the oldest uses for silver is jewellery and decorative items. Rings, necklaces,
bracelets; humans have adorned themselves with silver for millennia. Silver has also
been the benchmark of fine dining for centuries; the high quality but lower cost
making it the ideal choice for luxurious tableware over gold.
2. Bullion
Silver coins and bars are still produced regularly by refiners and mints globally.
Investors looking to protect their wealth, and potentially make money, treasure
silver as a safe investment with a lower entry cost compared to other precious
metals.
3. Mirrors
Silver has a very high reflectivity of light when polished, making it useful for mirrors
and related products. The panel of glass used in mirrors is covered with a thin layer
of silver to give it the reflectivity desired. Windows are also covered with silver in
order to reflect sunlight, protecting those inside from some of the sun’s UV light.
4. Cameras
Older analogue cameras would often use silver in their lenses; the reactivity of silver
being perfect for the light sensitive nature of photography. The film used in these
cameras was also treated with a silver based solution, leaving an after-image that's
ready for development once it is exposed to light.
5. Electronics
The number of applications for silver amongst electronics are too numerous to list.
As the best electrical conductor, silver is used somewhere in almost all electrical
items. Switches, for example, are often thin plates of silver and whether for power or

4. light switches, silver ensures a connector works. LED chips and touch-sensitive
screens mean that the mobile phones we use so regularly are also filled with silver
6. Energy
As the world looks to utilise the natural resources we have for sustainable energy,
silver has seen a growing demand for use in photovoltaic cells in solar panels. With
governments across the world declaring climate emergencies, and setting targets to
reduce carbon emissions, the solar energy industry is set to grow considerably over
the coming years.Even nuclear energy uses silver; control rods used to regulate the
fission reaction in a nuclear power plant are regularly made of an alloy containing
80% silver.
7. Engines
Ball bearings – electroplated with silver – play a key role in many engines; from cars,
to the jet engines on planes. With a high melting point, silver can withstand the high
temperatures that are produced by the friction of these intense machines.
8. Medicine
Silver is non-toxic to humans but is antimicrobial and antibacterial, giving it a
number of medical applications. Silver is used in the antiperspirants we spray every
day in the pursuit of cleanliness, as well as being used in the fight against the
growing tide of superbugs resistant to traditional antibiotics in hospitals.
9. Novelty Explosives
Every year on Christmas Day people around the world enjoy small explosions of
silver in the form of crackers. The small strip of cardboard inside a Christmas cracker
is covered with silver fulminate; when friction is applied this ignites, causing the
small explosive crack. Only very small amounts of silver fulminate are used however,
but given the amount of crackers made this figure becomes quite sizeable

5. FACTORS AFFECTING PRICE OF SILVER
1. Supply and Demand
The supply and demand equation for silver is one reason the metal is so valuable:
supply is limited but demand is constant. However, the basic economic fact of
markets is that any perceived or actual increase or decrease in supply or demand will
move prices, often disproportionate to the change itself.
2. Technology
Silver prices are directly and indirectly moved by existing and new technologies.
Many of these new uses for silver take advantage of physical characteristics found
only in this metal, making it virtually irreplaceable. Nonetheless, it is new demands
from solar photovoltaic systems and many green applications that generally make
technology a net bullish factor for silver demand and prices.
3. Economic Trends (Micro)
In good economic times, people spend a great deal of money on jewelry and items
that contain precious metals, such as silver. Likewise, if incomes stagnate or drop,
such purchases are often the first to be deferred. The level of growth and economic
health in emerging markets is watched as a major indicator of this segment of
demand.
4. National and Global Economic Trends
Vibrant economy may decrease demand for silver from investors and other buyers.
While that active economy will generate greater demand for silver in industrial and
jewellery applications, it does not pay a dividend or generate interest income.
5. Inflation
Silver, on the other hand, is seen historically as a great hedge against inflation.
Inflation will erode the value of paper currency, and silver can provide protection
against such losses in purchasing power.
6. Strength of the Dollar
As the leading global currency, the U.S. dollar generally has an inverse relationship
with the price of silver. Silver market participants have seen a history of a strong
dollar creating pressure on the price of silver.

6. INDIAN SILVER MARKET
India is one of the world’s largest silver markets, with a very traditional core in a diverse
market. To put this into perspective, India consumes 4,996t every year on an average, which
account for a noteworthy 16% of global silver demand. It is not only the scale of Indian
demand that matters; the country’s dependence on imported metal means that changes in
Indian offtake can impact those countries that supply bullion to India.
The sheer scale of the Indian silver market vibrates across much of the country, from
physical investment, through to day-to-day activities. It is also integral to India’s cultural and
belief systems. It is therefore not surprising that silver is an important part of Indian
festivities and weddings.
The silver market in recent years has evolved considerably in line with the growth in the
Indian economy and the rise in incomes.

7. Indian silver demand can be categorized into two broad areas: personal consumption and
industrial offtake. The first covers jewelry, silverware and physical investment, of which
jewelry is the largest sector. Together, these three accounts for around three-quarters of
Indian silver demand. The key drivers across all three segments of personal consumption are
the rupee silver price and income growth.
Bullion Imports
India is the world’s fourteenth largest producer of silver. However, at 436t, this falls
considerably short of the total required to satisfy Indian silver demand. In addition to this,
the Indian scrap market is also limited to around 100t per annum, which reinforces a
dependence on imported metal.
Mining and Recycling
Indian mines produced 436t of silver in 2016, making the country the fourteenth largest
silver producer globally. The majority of the silver produced in India is a by-product of zinc
mining in northern India. In addition to domestic mine production, silver in India is also
extracted from the processing of imported materials.
Silver Jewelry and Silverware
Silver jewelry and silverware fabrication account for more than 50% of Indian silver demand.
These are extremely traditional markets, although the demand drivers and the consumer
profile vary considerably between each segment. Typically, silver jewelry is purchased by
most income groups in India, whereas silverware is typically bought by the middle and
affluent classes.
Investment Demand
Indian investment demand for silver saw an unprecedented rise earlier this decade; in a
period of five years from 2010 to 2015, this surged from 800t to 3,400t. This in part
reflected bullish price expectations which led to a large section of physical precious metals
investors parking their funds in silver. Adding to these bullish expectations was the
government’s clamp down on unaccounted money and restrictive policies on gold imports.

8. AFFECT OF DOLLAR EXCHNAGE RATE FLUCTUATION ON
PRICE OF SILVER
The U.S. Dollar is the base currency for both gold and silver. This means in the global
commodity markets gold and silver are generally bought using U.S. Dollars. Therefore, if the
dollar weakens, gold and silver become cheaper to purchase and metal prices generally
increase. Whereas if the U.S. Dollar strengthens it becomes more expensive for investors to
buy gold and silver and on average precious metal prices will drop.
Movements in the U.S. Dollar tend to have a strong negative correlation with the price of
Silver; the Silver price can also affect movements in other currencies, especially those in
emerging markets. During times when a country’s domestic currency is weakening
dramatically, central banks tend to buy Silver to compensate for that loss in value.
Silver became an increasingly attractive option to emerging market central banks and
individuals as well due to its strong performance in 2016 to date. Furthermore, countries
suffering with high inflation tend to buy Silver as an inflation hedge. Since Silver is liquid and
frequently traded it is often viewed as an alternative currency. For developing countries
with volatile currencies Silver has become a popular investment with central banks,
especially in times of U.S. Dollar weakness.

9. DEMAND AND SUPPLY
Silver prices have seen a lot of volatility over the last 10 years, with price sharply rising from
2009 to 2011, mainly driven by rising investment demand for the metal in the wake of the
global financial crisis, which was followed by lower interest rates due to quantitative easing.
• Mine production constitutes over 85% of total silver supply in the market, followed
by scrap supply.
• Silver has a much larger industrial application, with the metal being used for
soldering and brazing alloys, batteries, dentistry, glass coatings, LED chips, medicine,
nuclear reactors, photography, photovoltaic energy, RFID chips, semiconductors,
touch screens, water purification, etc.
• Industrial application accounts for about 56% of total silver demand.
• Silver supply has witnessed volatility over the last 10 years, in line with demand
conditions.
• Supply decreased from 2010 to 2013, mainly due to reduction in supply of scrap.
However, during this period, mine supply was continuously rising as companies tried
to supply larger quantity to meet the booming demand from photovoltaic, and take
advantage of higher prices.
• Mine production dropped for the first time in 2016 driven by lower by-product
output from the lead/zinc and gold sectors, as well as a sharp decline of scrap supply
to the market.
• Mine supply further reduced in 2017 and 2018, as the Guatemala high court
suspended the license of its largest, Escobal, mine and operational and maintenance
disruptions in Canada.
• At the same time, the investment demand for the metal decreased from 2016 with a
pick up in the economy and expectations of higher interest rates. Though increased
industrial demand led to almost stable demand levels in the last three years.

10. ARBITRAGE OPPURTUNITIES IN SILVER
Precious metals are classified as commodities, and can be traded via multiple security
classes such as metal trading (spot trading), futures, options, funds, and exchange traded
funds (ETF). Silver is one of the most heavily traded and most popular commodities for
investments offering ample trading opportunities with high liquidity. Arbitrage involves the
simultaneous buying and selling of a security (or its different variants, like equity or futures)
to benefit from the price differential between the buy and sell price.
Many variants of arbitrage exist. For instance:
1. Market Location Arbitrage
The difference in demand and supply of a precious metal in one geographical market
(location) compared to that in another market could lead to a difference in price,
which arbitrageurs attempt to capitalize upon. This is the simplest and most popular
form of arbitrage.
2. Cash and Carry Arbitrage
This involves creating a portfolio of long positions in the physical asset (say, spot
silver) and an equivalent short position in the underlying futures of a suitable
duration. Since arbitrage usually involves no capital, financing is needed for a
physical asset purchase. Additionally, storage of an asset during the arbitrage
duration also incurs a cost.
3. Arbitrage in Different Precious Metals Asset Classes
Precious metals trading is also available through precious metals-specific funds and
ETFs. Such funds either operate on an end-of-day net asset value (NAV) basis (silver-
based mutual funds) or on a real-time exchange-based trading basis. All such funds
collect capital from investors and sell a specified number of fund units representing
fractional investments in the underlying precious metal.
4. Time Arbitrage
Another variant of arbitrage is time-based speculative trading aimed at an arbitrage
profit. Traders may take time-based positions in precious metals securities and
liquidate them after a specified time, based on technical indicators or patterns.

11. GLOBAL OUTLOOK ON SILVER MARKET
As per the Silver Institute, macroeconomic and geopolitical conditions will remain broadly
supportive for precious metals, encouraging investors to stay net buyers of silver overall, a
development that should lift silver prices higher this year. Additionally, we see continued
growth in physical silver investment, and forecast silver’s use as an industrial metal will rise
in 2020.
Silver Institute provides the following insights on 2020 silver market trends:
• Growth in silver industrial offtake is expected to resume in 2020, reversing two years of
marginal losses. While weak economic conditions, particularly in China, remain a
headwind to industrial output, a repeat of last year’s de-stocking along the supply chain
is unlikely.
• Demand from the electrical and electronics sector should account for the bulk of the
gains. Silver use in the automotive industry, for instance, is expected to enjoy impressive
growth. Despite weaker global car sales, silver demand should benefit from vehicles’
rising sophistication and electrification. Silver use in 5G-infrastructure and upcoming
intelligent electronics is also likely to fuel demand gains.
• Silver mine production is anticipated to grow by 2 percent in 2020, which would make it
the first annual increase in five years. This growth will be partly due to the contribution
from several recently commissioned mining operations and from the ramp-up of several
mine expansions to full production.
• Silver scrap supply is projected to rise for the fourth consecutive year, albeit by a small
amount, a reflection of the ongoing capacity expansion in the ethylene oxide market.
Rising metal prices could also stimulate jewelry and silverware scrap in price-sensitive
markets, such as India
• The silver market is expected to end this year with a structural surplus (total supply less
total demand) of roughly 15 million ounces. At that level, the surplus would be the
lowest in five years.