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Silver lining for Chinese investors

(China Daily)

09:06, November 01, 2011

A saleswoman arranges silver bracelets in a store in Nantong, Jiangsu province. Chinese investment in silver is booming since last year, with the trading volume exploding. Provided to China Daily

SHANGHAI - Chinese people have a cultural and historical liking for silver, as both ornaments and accessories. However, they are now increasingly seeing it in a new light, as an investment.

Investment in silver has been booming since last year, with the trading volume exploding.

The trading volume of silver forwards on the Shanghai Gold Exchange (SGE), China's only exchange for the precious metal, surged 751 percent year-on-year in 2010. Meanwhile, the volume in September this year was more than six times that of the same period in 2010.

The boom has come in tandem with a prolonged rally in silver prices, with the SGE's major Ag (T+D) contract rising about 60 percent year-on-year to 7,208 yuan ($1,163) on Monday.

The sudden passion for investment in the metal, analysts say, is the result of sluggish performances by the stock and property markets - the darlings of Chinese investors. Declines in the two markets left wealthy Chinese with fewer choices of where to park their money, and so they are banking on precious metals instead.

Strictly speaking, it's not so much an investment as pure speculation. Few people are buying silver in hope that industrial demand will pick up in the future or - as is usual for gold investors - to hedge against inflation. The bulk of investors are just speculating, or "gambling" as it was described by Liu Xu, a precious metal analyst with Beijing-based Capital Futures Co Ltd, in the hope of profiting from short-term market swings.

"Nobody is hedging risks with the forwards, though that's what they are designed," said Liu.

Commercial banks are also getting in on the act.

In August last year, Industrial and Commercial Bank of China Ltd (ICBC), China's biggest lender, launched paper silver trading for individual investors. Other banks soon followed suit. The trading volume of ICBC's paper silver products reached 300 tons in the first half, almost four times the figure for the whole of 2010.

Many retail investors prefer silver to gold because silver has a lower investment threshold. A 1 kg Ag (T + D) contract offered by SGE will cost about 7,000 yuan, whereas a gold contract starts at around 350,000 yuan at present. The SGE's trading volume for silver is now about four times that of gold.

However, silver prices have been more volatile, when compared with gold and have witnessed a number of major setbacks this year, including one on April 28, when the Ag (T+D) contract plummeted 7 percent on the day.

However, the volatility has not reduced the attractiveness of silver as an investment tool, according to Ma Wenyuan, an analyst with the Chengdu-based silver and gold broker CGS Co Ltd. "Volatility leaves room for speculation," he said.

The price of silver has been so volatile that the SGE adjusted margins on silver forward contracts six times in May. Margins were raised to as high as 20 percent on May 6, following the April 28 setback.

However, the boom in silver will not last forever, warned Ma.

"The boom will be over once monetary policy is loosened and the stock and property markets bounce back," he said.

"And then silver trading will be based more on industrial demand and the economic cycle. After all, silver, compared with gold, is more of an industrial material than an investment tool."

 
 
     
 
 
 
     
 
 
 
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