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Silver Vaults Stuffed Means Price Rising 30% in ’13: Commodities

By Chanyaporn Chanjaroen and Nicholas Larkin
December 20, 2012 4:27 PM EST 8 Comments
Gregor Gregersen, founder of Silver Bullion Pte., arranges a stack of silver bullion bars at the company's office in Singapore.
Photographer: Munshi Ahmed/Bloomberg
Gregor Gregersen, founder of Silver Bullion Pte., arranges a stack of silver bullion bars at the company's office in Singapore.

Silver Bullion Pte, one of Singapore’s largest suppliers of coins and bars to retail investors, says sales tripled since October, part of a global surge in demand that drove holdings to a record.

“Our clients are worried that a major currency crisis or mass bankruptcies would occur,” said Gregor Gregersen, the 36- year-old founder of Silver Bullion, whose sales now average about S$6 million ($4.9 million) a month. “It all has to do with falling confidence in the heavily indebted Western governments and financial institutions.”

Global investment through silver-backed exchange-traded products reached a record 18,854 metric tons in November, or more than nine months of mine output, data compiled by Bloomberg show. Holdings are now valued at about $19.2 billion. Prices will rise as much as 34 percent to $40.25 an ounce next year, based on the median of 49 analyst, trader and investor estimates compiled by Bloomberg.

Silver almost tripled since the end of 2008, lagging behind only platinum in gains for precious metals this year as policy makers from the U.S. to China to Europe pledged more action to boost economies. That’s attracting investors betting that stimulus will stoke inflation and debase currencies. It’s also luring those wagering growth will strengthen industrial demand for silver, 53 percent of which is used in everything from televisions to batteries.

Hedge Funds

The metal advanced 7.6 percent this year to $29.9675, compared with a 5.4 percent gain for gold and 11 percent rise for platinum. The Standard & Poor’s GSCI Index of 24 commodities dropped 0.2 percent, and the MSCI All-Country World Index of equities jumped 14 percent. Treasuries returned 1.8 percent, according to a Bank of America Corp. index.

Hedge funds and other large speculators increased bets on higher prices 12-fold since the end of June, to a net 34,862 futures and options, U.S. Commodity Futures Trading Commission data show. That’s about 50 percent higher than the average over the past five years, a period during which speculators have never been bearish.

Equity investors also bet on higher prices. Shares of Mexico City-based Fresnillo Plc (FRES), the largest primary silver producer, rose 23 percent this year. The company will report a 22 percent gain in net income to a record $927.1 million in 2013, according to the mean of seven estimates compiled by Bloomberg. Coeur d’Alene Mines Corp. in Idaho, which gets about 65 percent of its revenue from silver, fell 4 percent to $23.18 this year and will reach $31.89 in 12 months, the average of analysts’ predictions shows.

Deposit Boxes

Silver Bullion, which started in 2009 in a rented bedroom with 18,000 ounces, now has 246,000 ounces (7.65 tons) stored in vaults for customers as well as its own inventories. The company operates from the Certis CISCO Center, home to one of Singapore’s largest providers of safety deposit boxes. It sells everything from 1- to 32-ounce coins and 10- to 100-ounce bars, as well as gold, platinum and palladium.

Investors bought 1,464 tons through ETPs this year, data compiled by Bloomberg show. They will probably add another 300 tons in 2013, Barclays Plc estimates. That’s less than the so- called implied physical surplus that the bank says will reach 6,441 tons in 2013. Its analysts expect silver to average $32.50 next year, from $31.20 in 2012.

IMF Outlook

The surplus may drag prices lower should economic growth slow because it would curb demand for consumer goods. A car contains as much as 30 grams and a mobile phone about 0.25 gram, according to the Washington-based Silver Institute. While the International Monetary Fund expects a 3.6 percent global expansion in 2013, from 3.3 percent this year, the forecast was cut twice since July.

The metal retreated 23 percent in 2008 as the global economy tumbled into a recession. Japan and the 17-nation euro zone are contracting again this year and the Congressional Budget Office says the U.S. economy faces the same risk should lawmakers fail to resolve more than $600 billion of automatic spending cuts and tax increases scheduled to start next month.

Investors may also be dissuaded by the metal’s price swings. Its 100-day historical volatility is almost twice as high as gold, meaning investors are subject to bigger losses as well as gains. Silver for immediate delivery reached a record $49.79 in April 2011 before tumbling 35 percent in less than three weeks.

Bullion Market

Comex silver futures are valued at about $22.6 billion, compared with $72.4 billion for the bourse’s gold contracts, data compiled by Bloomberg show. Members of the London Bullion Market Association handled an average of $34.7 billion of gold a day in October, and $3.26 billion of silver.

Investors own 18,760.34 tons through ETPs, less than 1 percent below the record set on Nov. 15. Morgan Stanley predicts they will add a further 500 tons in 2013. The bank said in a report Dec. 6 that silver is among its top commodity picks for next year, along with gold, corn and soybeans, because it will be boosted by investor demand and a weaker U.S. currency.

Central banks are seeking to boost growth through printing money, increasing investor concern the actions will debase currencies and spur inflation.

The Federal Reserve said Dec. 12 it would buy $45 billion of Treasury securities a month from January, adding to $40 billion a month of existing mortgage-debt purchases. Silver jumped about 53 percent during the first round of so-called quantitative easing from December 2008 through March 2010, twice the gain in gold. It advanced 24 percent in the second phase that ended in June 2011, about three times more than the other metal. The central bank bought $2.3 trillion of debt in total.

Subway Station

The scale of intervention is a sign to some investors that markets will be roiled once more by financial meltdowns. That’s reflected in Silver Bullion’s sales, which reached S$38 million in 2011, from S$700,000 in the first year of business. Orders were also boosted by the government lifting a goods and service tax on investment-grade gold, silver and platinum from Oct. 1.

While Gregersen’s first sale was made in a Singapore subway station, his company is now a member of the Singapore Bullion Market Association, with suppliers from the Perth Mint in Australia to the Mexican central bank.

“There’s going to be another big crash, we are really near it now,” said Chin Kuan Yew, a businessman and Silver Bullion customer who sold all his properties, including his condominium, to buy more metal. “You have on the one hand the U.S. printing money and the European Union is on the brink of collapse.”

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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