The London Bullion Market Association ISSUE 60 Sept ember 2010 In this issue Gauging the Long-Term Cost of Gold Mine Production by Mark Fellows page 3 Silver Investment in the UnitedStates and India by Michael DiRienzo page 8 Broking: Computerwelt by Darryl Hooker page 11 LBMA Edelmetalle Conference Preview 2010 by Edel Tully page 14 London Good Delivery History The Making of a Masterpiece by Alice Toulmin page 16 LBMA News by Stewart Murray page 17 Regulation and Cleared Forwards Editorial Comment by David Gornall page 22 The Rise and Fall of the GoldProducer Hedge Book Open Pit Gold Mine–Castle Mountain Mine, near Searchlight, Nevada. by William Tankard Mark Fellows discusses gold mine economics on page three. page 22 All the metals – all the angles – all the time (cid:54)(cid:92)(cid:71)(cid:81)(cid:72)(cid:92) (cid:43)(cid:82)(cid:81)(cid:74)(cid:3)(cid:46)(cid:82)(cid:81)(cid:74) (cid:55)(cid:82)(cid:78)(cid:92)(cid:82) (cid:47)(cid:82)(cid:81)(cid:71)(cid:82)(cid:81) (cid:49)(cid:72)(cid:90)(cid:3)(cid:60)(cid:82)(cid:85)(cid:78) (cid:47)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:23)(cid:25)(cid:3)(cid:42)(cid:68)(cid:87)(cid:72)(cid:90)(cid:68)(cid:92) (cid:54)(cid:88)(cid:76)(cid:87)(cid:72)(cid:3)(cid:20)(cid:22)(cid:19)(cid:25) (cid:21)(cid:16)(cid:20)(cid:3)(cid:50)(cid:75)(cid:87)(cid:72)(cid:80)(cid:68)(cid:70)(cid:75)(cid:76) (cid:23)(cid:87)(cid:75)(cid:3)(cid:41)(cid:79)(cid:82)(cid:82)(cid:85) (cid:21)(cid:19)(cid:19)(cid:3)(cid:51)(cid:68)(cid:85)(cid:78)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72) (cid:20)(cid:3)(cid:48)(cid:68)(cid:70)(cid:84)(cid:88)(cid:68)(cid:85)(cid:76)(cid:72)(cid:3)(cid:51)(cid:79)(cid:68)(cid:70)(cid:72) (cid:55)(cid:90)(cid:82)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:54)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72) (cid:20)(cid:16)(cid:38)(cid:75)(cid:82)(cid:80)(cid:72) (cid:54)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:87)(cid:76)(cid:81)(cid:86)(cid:3)(cid:38)(cid:82)(cid:88)(cid:85)(cid:87) (cid:49)(cid:72)(cid:90)(cid:3)(cid:60)(cid:82)(cid:85)(cid:78) (cid:54)(cid:92)(cid:71)(cid:81)(cid:72)(cid:92) (cid:27)(cid:3)(cid:38)(cid:82)(cid:81)(cid:81)(cid:68)(cid:88)(cid:74)(cid:75)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:70)(cid:72) (cid:38)(cid:75)(cid:76)(cid:92)(cid:82)(cid:71)(cid:68)(cid:16)(cid:46)(cid:88) (cid:20)(cid:19)(cid:3)(cid:51)(cid:68)(cid:87)(cid:72)(cid:85)(cid:81)(cid:82)(cid:86)(cid:87)(cid:72)(cid:85)(cid:3)(cid:53)(cid:82)(cid:90) (cid:49)(cid:60)(cid:3)(cid:20)(cid:19)(cid:20)(cid:25)(cid:25)(cid:3)(cid:19)(cid:20)(cid:22)(cid:19) (cid:49)(cid:54)(cid:58)(cid:3)(cid:21)(cid:19)(cid:19)(cid:19) (cid:38)(cid:72)(cid:81)(cid:87)(cid:85)(cid:68)(cid:79)(cid:15)(cid:3)(cid:43)(cid:82)(cid:81)(cid:74)(cid:3)(cid:46)(cid:82)(cid:81)(cid:74) (cid:55)(cid:82)(cid:78)(cid:92)(cid:82)(cid:3)(cid:20)(cid:19)(cid:19) (cid:47)(cid:82)(cid:71)(cid:82)(cid:81)(cid:3)(cid:40)(cid:38)(cid:23)(cid:48) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:25)(cid:20)(cid:3)(cid:21)(cid:3)(cid:28)(cid:21)(cid:24)(cid:25)(cid:3)(cid:28)(cid:23)(cid:23)(cid:21) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:27)(cid:24)(cid:21)(cid:3)(cid:21)(cid:27)(cid:28)(cid:28)(cid:3)(cid:21)(cid:19)(cid:21)(cid:25) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:27)(cid:20)(cid:3)(cid:22)(cid:3)(cid:22)(cid:21)(cid:24)(cid:27)(cid:3)(cid:22)(cid:23)(cid:19)(cid:26) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:23)(cid:23)(cid:3)(cid:21)(cid:19)(cid:3)(cid:26)(cid:23)(cid:27)(cid:28)(cid:3)(cid:25)(cid:26)(cid:25)(cid:20) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:20)(cid:3)(cid:21)(cid:20)(cid:21)(cid:3)(cid:27)(cid:26)(cid:27)(cid:3)(cid:23)(cid:20)(cid:21)(cid:21) ALCHEMIST ISSUE SIXTY Gauging the Long-Term Cost of Gold Mine Production By Mark Fellows, Managing Director, GFMS Mine Economics What is the ‘true’, fully loaded Figure 1: Drivers of Gold Mine Economics cost of global gold mine production, and what factors decide it? In this article, we aim to quantify the long-term equilibrium price required to sustain the industry. We also examine the impact of derived from a ‘bottom-up’ understanding of by reducing cut-off grade, exploiting previously changes in the main production resource quality, orebody geometry, mining and uneconomic mineralisation. This has the effect processing methods, labour costs, productivity, of extending mine life, while lowering gold cost drivers: orebody quality, input energy usage and consumable input costs. output and causing costs to rise. Some mines are inherently more flexible than others, with costs, currency value and metal The Drivers of Gold Mine larger, higher-grade, ‘massive’, near-surface Profitability orebodies having significant advantages in this prices. Figure 1 shows the main factors that interact to regard. dictate the profitability of a gold mining Believe it or not, gold mining is not a simple operation. At first glance, the diagram would activity. Despite the archetypal image of a basic seem to imply that few of the drivers can be industry, with grizzled miners toiling away significantly influenced by mine management, shifting dirt, gold mines are in fact highly but this is not really the full story, as the relative complex, dynamic systems. Multiple importance of the factors shown varies controllable and non-controllable factors, some enormously. of which interact in unpredictable ways, affect Strategy is the overriding factor, dictating output levels and profitability. To add to the the scale of operation, mining and processing complexity, global gold mines are techniques used, and mine lifespan. This is in All the metals – all the angles – all the time heterogeneous, varying widely in geology, scale, turn dependent on resource quality, which is to technologies and cost structure. some extent uncontrollable, but a key point in As a result, considerable care must be taken this regard is that resource size and grade can when analysing, summarising and be influenced by strategy. How much is prognosticating about the industry. Bearing management willing and able to invest in that in mind, this article draws upon the exploration ahead of production? What cut-off analysis in GFMS’s Gold Mine Economics grades do they select? service to reach some conclusions about the Cut-off grade selection is arguably the main long-term economics of the sector. factor deciding the economics of a mine, as it The Gold Mine Economics service dictates the tonnage and grade of ore to be comprises detailed mine-by-mine analysis of mined, and in turn the scale, lifespan and reserves/resources, production, operating profitability of the operation. Cut-off grade is costs, capital costs and cash flows for more than defined as the lowest grade of ore that it is 300 gold mines and projects, with historical economically feasible to extract, and it in turn data and forecasts to 2030. By benchmarking depends on forward-looking metal prices, (cid:54)(cid:92)(cid:71)(cid:81)(cid:72)(cid:92) (cid:43)(cid:82)(cid:81)(cid:74)(cid:3)(cid:46)(cid:82)(cid:81)(cid:74) (cid:55)(cid:82)(cid:78)(cid:92)(cid:82) (cid:47)(cid:82)(cid:81)(cid:71)(cid:82)(cid:81) (cid:49)(cid:72)(cid:90)(cid:3)(cid:60)(cid:82)(cid:85)(cid:78) detailed technical, operating and financial operating parameters and cost assumptions parameters, we aim to provide the best possible made by mine management. (cid:47)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:23)(cid:25)(cid:3)(cid:42)(cid:68)(cid:87)(cid:72)(cid:90)(cid:68)(cid:92) (cid:54)(cid:88)(cid:76)(cid:87)(cid:72)(cid:3)(cid:20)(cid:22)(cid:19)(cid:25) (cid:21)(cid:16)(cid:20)(cid:3)(cid:50)(cid:75)(cid:87)(cid:72)(cid:80)(cid:68)(cid:70)(cid:75)(cid:76) (cid:23)(cid:87)(cid:75)(cid:3)(cid:41)(cid:79)(cid:82)(cid:82)(cid:85) (cid:21)(cid:19)(cid:19)(cid:3)(cid:51)(cid:68)(cid:85)(cid:78)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72) insight into the drivers of the industry’s cost Cut-off grade provides the mechanism by (cid:20)(cid:3)(cid:48)(cid:68)(cid:70)(cid:84)(cid:88)(cid:68)(cid:85)(cid:76)(cid:72)(cid:3)(cid:51)(cid:79)(cid:68)(cid:70)(cid:72) (cid:55)(cid:90)(cid:82)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:54)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72) (cid:20)(cid:16)(cid:38)(cid:75)(cid:82)(cid:80)(cid:72) (cid:54)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:87)(cid:76)(cid:81)(cid:86)(cid:3)(cid:38)(cid:82)(cid:88)(cid:85)(cid:87) (cid:49)(cid:72)(cid:90)(cid:3)(cid:60)(cid:82)(cid:85)(cid:78) structure. Based on a stringent methodology which miners respond to changing metal (cid:54)(cid:92)(cid:71)(cid:81)(cid:72)(cid:92) (cid:27)(cid:3)(cid:38)(cid:82)(cid:81)(cid:81)(cid:68)(cid:88)(cid:74)(cid:75)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:70)(cid:72) (cid:38)(cid:75)(cid:76)(cid:92)(cid:82)(cid:71)(cid:68)(cid:16)(cid:46)(cid:88) (cid:20)(cid:19)(cid:3)(cid:51)(cid:68)(cid:87)(cid:72)(cid:85)(cid:81)(cid:82)(cid:86)(cid:87)(cid:72)(cid:85)(cid:3)(cid:53)(cid:82)(cid:90) (cid:49)(cid:60)(cid:3)(cid:20)(cid:19)(cid:20)(cid:25)(cid:25)(cid:3)(cid:19)(cid:20)(cid:22)(cid:19) for analysing mine operating costs, analysis is prices. If prices rise, they can extend mine life (cid:49)(cid:54)(cid:58)(cid:3)(cid:21)(cid:19)(cid:19)(cid:19) (cid:38)(cid:72)(cid:81)(cid:87)(cid:85)(cid:68)(cid:79)(cid:15)(cid:3)(cid:43)(cid:82)(cid:81)(cid:74)(cid:3)(cid:46)(cid:82)(cid:81)(cid:74) (cid:55)(cid:82)(cid:78)(cid:92)(cid:82)(cid:3)(cid:20)(cid:19)(cid:19) (cid:47)(cid:82)(cid:71)(cid:82)(cid:81)(cid:3)(cid:40)(cid:38)(cid:23)(cid:48) page 3 (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:25)(cid:20)(cid:3)(cid:21)(cid:3)(cid:28)(cid:21)(cid:24)(cid:25)(cid:3)(cid:28)(cid:23)(cid:23)(cid:21) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:27)(cid:24)(cid:21)(cid:3)(cid:21)(cid:27)(cid:28)(cid:28)(cid:3)(cid:21)(cid:19)(cid:21)(cid:25) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:27)(cid:20)(cid:3)(cid:22)(cid:3)(cid:22)(cid:21)(cid:24)(cid:27)(cid:3)(cid:22)(cid:23)(cid:19)(cid:26) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:23)(cid:23)(cid:3)(cid:21)(cid:19)(cid:3)(cid:26)(cid:23)(cid:27)(cid:28)(cid:3)(cid:25)(cid:26)(cid:25)(cid:20) (cid:55)(cid:72)(cid:79)(cid:29)(cid:3)(cid:20)(cid:3)(cid:21)(cid:20)(cid:21)(cid:3)(cid:27)(cid:26)(cid:27)(cid:3)(cid:23)(cid:20)(cid:21)(cid:21) THE LONDON BULLION MARKET ASSOCIATION As gold prices have risen roughly five-fold is defined as capital expenditure necessary to in production. As the gold price recovered since 1999, average gold mine ore grades have sustain production rates at a mine. The global from 2002 onwards, positive all-in cost margins fallen by nearly 30%, in large part due average all-in cost for 2009 was were quickly re-established and maintained. to this cut-off grade response. This The $717/oz, up $27/oz on 2008. However, until 2009, miners were unable to also partly explains why gold Although cash cost measures deliver sustained production growth, given that mine production has not fixation on cash such as total cash cost are a they were reducing cut-off grades to take increased significantly, as useful gauge of advantage of higher prices, extending mine life producers have focused costs has fostered a competitiveness at the mine- at the expense of higher costs. instead on extending their by-mine level, they do not mine lives. This has been general perception that account for a substantial Implications for Long-Term Prices: When Germany introduced the Gold Standard in 1871, our company exacerbated by a ‘discovery portion of the cost required The Future … drought’, with very few global gold mine margins to develop and sustain gold Although all-in cost is undoubtedly a superior had already been a world leader in precious metals for 20 years world-class gold orebodies mining operations, so are measure of ‘full’ industry production costs, we being discovered in recent are higher than is arguably less useful as a admit that it does not account for certain cost years, despite record measure of ‘real’ industry components that also have a bearing on the true exploration expenditure. Over actually the case. margins, or the long-term gold long-term break-even cost of gold mine the same period, all-in production price required to incentivise gold production. costs have more than doubled, partly mine production growth. All-in costs include sustained/ongoing due to severe input cost inflation, but also The historic relationship between all-in capital expenditure and depreciation of sunk due to lower cut-off grades. costs and gold price paints a clear picture. capital costs, but not current-year project Figure 2 shows the sensitivity of gold mine During the 1997 to 2001 bear market, average development and expansion capital costs. In production costs to the main drivers, on a all-in cost margins were strongly negative, with 2009, the gold mining industry invested an global average basis. For instance, a 10% fall in costs tracking the gold price downwards in an average of $173/oz of global production in global average ore grade gives rise to a $50/oz effort to regain profitability, or at least remain project development and mine expansion. rise in average production costs. Besides grades and process recoveries, Figure 2: Sensitivity of Production Costs to Key Drivers production costs have the highest sensitivity to changes in exchange rates, with a 10% strengthening of the dollar giving rise to a $47/oz fall in average production costs on a global average basis. Exchange rates are usually the largest single determinant of year-on-year global average production cost changes. 140 years later we are still setting the standards With regard to input costs, labour is by far the most sensitive cost component, by virtue of when it comes to precious metals expertise. its large proportion of a typical operating cost base. Production Cost Metrics: What’s Useful? GFMS contends that the gold mining industry’s historic preference for reporting and Precious Metals Trading. Refining. Investment. Industrial Products. An entire world in just one word: Heraeus. comparing cash cost parameters, rather than adopting a profitability measure that is more reflective of the true, ‘fully loaded’ costs of Source: GFMS Mine Economics At one time precious metals were the currency of the Strongly supported by our four trading units in Hanau, Hong Kong, production, has ultimately proved misleading world. Even today they are still treated and traded as Shanghai and New York, we assist our customers in professionally and counterproductive. Figure 3: All-in Cost versus Gold Price (rebased to 2009 $ terms) financial products; globally, unrestricted by place and time. managing the risks associated with the physicalacquisition, The fixation on cash costs has fostered a For just as long, precious metals have also played a vital pricefluctuations or financing of precious metals. general perception that global gold mine margins are higher than is actually the case. role in a manifold of industrial applications. All-in cost is a proprietary GFMS Mine In addition, our company also offers a large number of products Economics $/oz cost metric, designed to Heraeus has played a vibrant role in both areas for almost to investors: A wide range of gold, silver, platinum and palladium reflect the full marginal cost of gold mining. In 160 years, and during this time our company has earned investment bars, from a filigree 1 gram gold bar right up to addition to mine site cash expenses (mining, a reputation as a leading expert and competent partner for a massive 5 kg silver ingot, can satisfy the wishes of any ore processing, on-site general and the refining, trading and manufacturing of precious metals. physical investor. administrative costs), refining charges, royalties and production taxes, by-product credits, depreciation, amortisation and reclamation cost, it includes ongoing capital expenditure, indirect costs and overheads. The latter includes corporate administrative costs, interest charges, mine site exploration and any extraordinary charges, such as retrenchment costs, carrying value write-downs, etc. Ongoing (‘stay-in-business’) capital expenditure Source: GFMS Mine Economics Hanau Hong Kong Shanghai New York [email protected] [email protected] [email protected] [email protected] page 4 Phone +49 6181.35-2750 Phone +852 2773 1733 Phone +86 21 33575675 Phone +1 212 7522180 www.heraeus-trading.com When Germany introduced the Gold Standard in 1871, our company … had already been a world leader in precious metals for 20 years 140 years later we are still setting the standards when it comes to precious metals expertise. Precious Metals Trading. Refining. Investment. Industrial Products. An entire world in just one word: Heraeus. At one time precious metals were the currency of the Strongly supported by our four trading units in Hanau, Hong Kong, world. Even today they are still treated and traded as Shanghai and New York, we assist our customers in professionally financial products; globally, unrestricted by place and time. managing the risks associated with the physicalacquisition, For just as long, precious metals have also played a vital pricefluctuations or financing of precious metals. role in a manifold of industrial applications. In addition, our company also offers a large number of products Heraeus has played a vibrant role in both areas for almost to investors: A wide range of gold, silver, platinum and palladium 160 years, and during this time our company has earned investment bars, from a filigree 1 gram gold bar right up to a reputation as a leading expert and competent partner for a massive 5 kg silver ingot, can satisfy the wishes of any the refining, trading and manufacturing of precious metals. physical investor. Hanau Hong Kong Shanghai New York [email protected] [email protected] [email protected] [email protected] Phone +49 6181.35-2750 Phone +852 2773 1733 Phone +86 21 33575675 Phone +1 212 7522180 www.heraeus-trading.com THE LONDON BULLION MARKET ASSOCIATION Likewise, all-in costs exclude greenfield (i.e. these cost drivers will doubtless continue to Mark Fellowsis early-stage project) exploration expenditure, creep upwards in future. The largest single cost Managing Director which is estimated to equate to $35-$60/oz of component, labour costs, continue to rise; for of GFMS Mine annual production. Taking these additional instance, in local currency terms, South African Economics. costs into account, GFMS Mine Economics labour costs have increased by 10% per annum Mark began his 23- contends that the ‘true’ long-term cost of gold on average since 1999, with the two-year year career in the mine production stood somewhere between agreement signed by the main producers in mining industry as $925 and $950/oz in 2009, a sobering thought 2009 committing to ongoing 7.5-10.5% wage an exploration when one remembers that this figure does not increases. There is undoubtedly a tendency, geologist with Anglo allow for any return to shareholders. now established, toward increasing unit labour American/De Beers. Long-term equilibrium production costs costs in developing countries, as globalised He went on to work will remain highly sensitive to the key cost mining companies export better operating for several junior drivers, some of which are partially within practices, along with higher productivity levels explorers, prospecting for diamonds, managements’ area of influence or control, but and better pay. gold, base metals and industrial most of which are uncontrollable. Many of Similarly, other input costs will continue to minerals in Africa. In 1992, he rise in real terms, as energy and consumable joined Brook Hunt, a globally costs are pushed upward by increased renowned mineral economics competition for resources, and greater consultancy, serving as a director, regulatory and tax burdens, such as carbon responsible for BH’s Gold Mine taxes. Costs study and numerous bespoke This said, as highly complex dynamic consulting assignments from 1999 to systems, well-managed gold mines will 2005. continue to adapt, utilising whatever flexibility GFMS Mine Economics was is provided by their orebodies. Despite record launched in early 2009, with aim of exploration expenditure, the extent to which delivering high-quality, detailed this will be bolstered by the discovery of new insight into the economics of mine world-class deposits over the coming years production, exploration and remains to be seen. n development, across a broad range of metals and minerals. [email protected] Market Moves Toronto Dominion Bank Tim Gardinerheads the Global Precious Metals team at TD Securities. He’s joined by Steve Scacalossi, DavidSwinburneand Matthew Hopkinsin Toronto; Bob Davis, Peter Airlieand Alex Popin London; and Ruark Linekerand Joe Bowdenin Singapore. Christian Pfeiferto UBS John Reidto Christian has joined UBS to trade PM Spot. He will be based in MetalorTechnologies SA London. He previously worked at Mitsui London and prior to John has joined Metalor as that Heraeus NY. Group Treasury. He previously worked as Head of Global Markets Lucien Weisento Commerzbank for the Rand Refinery in South Lucien started his banking career at UBS Luxembourg as an FX Africa and prior to that worked for Barclays Bank, ABN Amro trader in 1984, covering the forward books as well as precious and Nedbank amongst others. metals for wealth management. After 14 years at UBS, he moved to DresdnerBank Luxembourg to cover the same role Jamie Graceto Standard Chartered for the next 12 years. In April 2010 he joined Commerzbank’s Jamie has joined Standard Chartered as Head of Metals Options precious metals desk in Luxembourg, where he covers Spot and Trading. He is based in London and with the Commodities Forwards. Derivatives Team. Jamie has 16 years’ experience trading financial derivatives and previously worked at Calyon as Head of David Corcoranto SociétéGénérale Commodity Option trading, and at JPMorgan for 12 David started at SG in late August. He previously worked at years,where he held the position of Global Head of Oil Option Dresdner Bank, Credit Suisse, JP Morgan and Johnson Matthey Trading. Bankers. Your global partner for precious metals Active in the physical and non-physical markets for almost a century, our award winning dedicated team offers you a ‘one stop shop’ for precious metals trading, investing and hedging: • Gold, silver, platinum and palladium • 24h global service from hubs in Switzerland, the US, Singapore and the UK • Physical precious metals custody in our Swiss vaults • Coins – trading, handling and storage • Structured products and tailor-made hedging solutions • Full range of OTC derivatives • Gold ETF Quality, security and competitive pricing are backed by seamless clearing and execution and supported by market-leading research. The UBS Precious Metals team continues to be the partner of choice around the world. How can we put our resources to work for you? Zurich: +41-44-239 4111 Stamford: +1-203-719 1178 Lugano: +41-91-801 9990 Singapore:* +65-6495 8474 Geneva: +41-22-389 5335 London:* +44-207-567 6758 *non physical only www.ubs.com No. 1 Dealer in Precious Metals – Gold Forwards, Options and Spot, Risk 2010. © UBS 2010. All rights reserved. 04441 THE LONDON BULLION MARKET ASSOCIATION Silver Investment in the United States and India By Michael DiRienzo, Executive Director, The Silver Institute While India and the United investments. More sophisticated investors have record of 78.7 Moz in 2009, driven by a spike sought to leverage silver investing with mining in retail demand. This increase was led States stand out as two of the shares and mutual funds and more recently with primarily by the United States and Western exchange-traded funds (ETFs). Europe. Looking at the table below, silver coin most important drivers for silver When examining current silver investment and medal fabrication increased nearly 60% in the United States and India, it is important to between 2000 and 2009. investment demand, how they do look at the global picture. Over the course of the last three years, world investment has more Silver Investment in the United it is a study in contrasts. The than tripled, rising from 61.7 Moz (millions of States ounces) in 2007 to 215.6 Moz in 2009.1 From In the United States, physical investment in roots of their silver investment are 2008 to 2009, global silver investment leapt by silver is dominated by the purchase of one- a staggering 184%. ounce bullion coins and 100-ounce bars. The well established and the past Perhaps one of the most important bars are almost entirely produced locally. developments in the silver investment market However, the surge in demand during 2008 saw several years of global economic in the past 50 years was the advent of precious a number of other institutions start to produce metals ETFs in 2004. These investment their own bars, including private mints and turmoil have only served to products, which trade like stocks, have served industrial manufacturers. to ‘democratise’ global silver investing by The coin market is dominated by the US reaffirm these two nations’ making it convenient for retail investors who Mint’s Eagle one-ounce bullion coin. A number might otherwise have eschewed silver investing of overseas bullion coins have also proved affinity with the white metal. because of the difficulties of storage, insurance popular in the United States, particularly the and assaying. That convenience, coupled with a Canadian Maple Leaf, although for example the Indian silver demand, like gold, is largely global financial crisis and greater shifts toward Austrian Vienna Philharmonic and Australian fuelled by rural investors, mainly farmers who portfolio diversification, has pushed the silver Kookaburra, Lunar and Koala coins have all seek to convert some of their income into price higher in recent years. Examining ETFs achieved some success. savings in the form of bangles, other jewellery more closely, total holdings in 2009 rose by The silver Eagle, first introduced in 1986, and decorative ornaments. Shifts in 132.5 Moz, ending the year at 397.8 Moz. The saw sales remain broadly stable during much of demographics are slowly changing investment growth was the product of increased holdings the 2000s, averaging 9.4 Moz during 2000- patterns in India, as increasing numbers move of the three funds that were active to urban areas. The June-to-September at the beginning of 2009, and the monsoon season remains an important factor in launch of new silver ETFs in silver demand and bountiful rains are often the Australia and United States last harbinger of upticks in investment. year. On the whole, between The United States has a rich history of silver 2005 and year-end 2009, the mining and investment. American investors silver price increased a staggering have long had a predilection for physical silver, 141%. favouring coins and bars to stash investment Turning to global silver coin cash. On the retail side, many smaller investors and medal fabrication, this like the portability of coins and smaller bars, segment of investment demand and the discretion that comes with such grew by a hearty 21% to a new page 8 ALCHEMIST ISSUE SIXTY 2007. However, since 2008, minting has Silver Investment in India continue to hold off a significant swing to the increased substantially, with total coin output in Today in India, investment in silver continues to upside in this segment. both 2008 and 2009 achieving successive take place in what might be termed ‘traditional Notwithstanding the preferred form of records of 19.6 Moz and 28.8 Moz. forms’, namely heavy, high-karat, low-labour, investment, there still exists an active two-way Furthermore, 2010 is on course to post a new plain silver jewellery (silverware, as a form of market for each segment. In this regard, while record high, with combined January-to-July investment, has been adversely affected in jewellery would typically be sold back once in a sales up 27% year-on-year. Demand for these recent years due to under-karating), as well as given year (mainly during May and June to fund coins is so strong that the US Mint has at times through the hoarding of bars. In contrast, coins the sowing of monsoon crops), the trading in struggled to keep pace. At the heart of the are a small fraction of the overall Indian bars might be more frequent, being more problem is the difficulty in sourcing sufficient investment market. dependent on changing investor price planchets (or blanks). Silver jewellery forms the bulk of expectations. The growth in silver investment demand investment in rural areas, while urban centres In terms of recent trends in the Indian during 2008 pre-dated the collapse of Lehman show a preference for lower mark-up bars. market, the record level of investment in 2008 Brothers, although the ensuing credit crisis led That said, some rural areas have also developed was due to a combination of strong demand to heightened retail demand. This surge also an interest in bars, particularly those that are from urban dwellers and from led to heightened retail purchases of 100-ounce well connected to cities. Overall, retail silverware/jewellery fabricators. Both of these bars. Again, demand was so marked that jewellery consumption grew by 6% in 2009, groups deemed prevailing silver prices to be shortages emerged in the bar market, which again driven primarily by an improvement in undervalued, with expectations therefore of encouraged a number of new entrants to begin demand from rural areas, which are the strong future gains. Conversely, the rush to their own production. backbone of the heavy jewellery market in disinvest in 2009 was arguably of little surprise, In 2010, although US bar demand has fallen weight terms. The modern jewellery segment given that rupee silver prices had broadly noticeably, US coin minting has continued to saw considerable growth in 2009, both locally fulfilled investors’ expectations, resulting in grow, driven by firm demand at home and and for exports. Among other things, higher both actual dishoarding and the manufacture of overseas, principally in Western Europe, gold prices spurred substitution into silver. bars into jewellery and silverware, which would encouraged by Europe’s sovereign debt crisis. Ongoing urbanisation, concerns over elevated also be classified as dishoarding. This pattern prices and issues related to under-karating was spread throughout the year, despite the fact In terms of recent trends in the Indian market, the record level of investment in 2008 was due to a combination of strong demand from urban dwellers and from silverware/jewellery fabricators. page 9 THE LONDON BULLION MARKET ASSOCIATION that until July the average year-on- Michael DiRienzo year silver price was some 7% lower. serves as the Executive According to GFMS, this Director of the Silver disinvestment was not price-related Institute, an international and essentially was the consequence association whose of the conversion of bars, acquired by membership comprises The London Gold Market Fixing the trade the year before, into major participants in the jewellery and silverware. Toward the silver industry. In that latter part of the year, disinvestment capacity, Michael manages Limited has announced that took a more conventional form – the Institute’s overall daily investors taking profits on escalating activities, budget prices. development and there will be no afternoon gold This year, it appears as though management, implementing the annual plan, India may see a modest return to net and public affairs activities. hoarding. With local prices hovering From 1999-2002, Michael served as Fixings on Christmas Eve, around Rs29,000/kg at the time of Vice President of the Gold Institute, managing writing, many investors have been that association’s government and public discouraged from entering the silver relations activities. Prior to 1999, Michael Friday 24th December 2010, market. It therefore appears that served as a government affairs representative for prices below Rs25,000/kg may be Janus/Merritt Strategies, a political and required to stimulate retail interest in strategic management firm. Michael also nor New Year’s Eve, the Indian market. However, as gold represented a member company of the Toyota continues to push higher, the Indian Group as Director of Government Relations. investor’s desire may increase, Formerly, Michael served as Legislative Assistant Friday 31st December 2010. especially if bountiful monsoon rains and Press Secretary to the Chairman of the bring better harvests. n House Rules Committee, U.S. Congressman David Dreier (R-CA). During his tenure with 1World Silver Survey 2010, which is the Chairman, Michael worked on Banking produced by GFMS Ltd on behalf of the Committee and Small Business Committee issues. Silver Institute