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1、Market Trend ReportTrends in Indian Investment DemandJanuary,2023Conducted By:Metals FocusIndian Silver Investment2January 2023Contents1.Introduction 2.Physical Investment3.Exchange-Traded Products4.Digital Silver5.Futures6.Prospects for Silver on the IIBX345789Indian Silver Investment3January 20231

2、.IntroductionSilver and gold are both widely recognized as savings and investment assets in India,a reflection(historically)of the low penetration of banking and other financial products.Even after the economic liberalization in 1991,as Indias economic growth has markedly improved,and with it dispos

3、able incomes,these characteristics have not changed materially,especially across rural India and semi-urban centers.Other important drivers of precious metals investment have been the liquidity they provide(as collateral to secure finance)and as a means to store unaccounted wealth.In this context,hi

4、storically the low penetration of banking products in India has meant that borrowers have often relied on informal funding channels.In the unorganized and informal segments of the market,lenders offer loans backed by collateral,a role that precious metals have often satisfied.Furthermore,India has r

5、elatively high levels of cash circulating in the economy.As such,it is not difficult to convert large amounts of money into precious metals to circumvent taxes,which can then be conveniently stored.The above-mentioned factors are common for both gold and silver.That said,since 2014,there have been s

6、ome notable policy and regulatory changes which have structurally altered investment in precious metals,both in terms of their role as a savings and as an investable asset.In this regard,the governments push towards providing banking services to the entire population,the crackdown on both tax evasio

7、n and cash transactions(which was spurred on by the demonetization of high value currency notes in 2016 and then,in 2017,the introduction of the Goods and Services Tax)have played a key role.Improved banking penetration has resulted in savings being diverted towards banking and insurance products,wh

8、ich to some extent has undermined the role precious metals play as a savings vehicle.Given the high value of gold,this trend has affected the yellow metal in recent years much more than silver,which has not faced similar scrutiny and in fact benefited at times from this as investors moved towards si

9、lver.That aside,the rapid growth in Indias digital eco-system,facilitated by access to high-speed/low-cost internet services and increasing financial awareness,has enabled investors to increasingly choose other financial products,such as equities and mutual funds.This is especially true among the yo

10、unger generation which tends to be tech-savvy and can be less averse to investing in riskier financial products.While all this has the potential to negatively impact physical investment,it also presents an opportunity for other forms of investment,such as digital silver and silver exchange-traded pr

11、oducts(ETPs),which can benefit from the growth of the digital ecosystem.Both vehicles have been launched in India in the last three years,but have seen mixed results.While ETPs have enjoyed some momentum,albeit modestly,digital silver has struggled.Metals Focus believes that one of the key factors u

12、ndermining growth in ETPs and digital silver is a lack of investor awareness.Indian Silver Bullion Imports0501001502002503003502010 2012 2014 2016 2018 2020 2022MozSource:Indian CustomsIndian Silver Investment4January 2023With regards to ETPs,large fund houses have launched these products which has

13、helped them gain some traction and a wider reach compared to digital.By contrast,while digital silver has been launched by a few players in the last three years it is yet to benefit from any significant investor inflows.Metals Focus research suggests that three factors have impeded growth,including

14、the absence of clear regulations,a lack of marketing and high buy-sell spreads.Turning to futures trading,while this has been available to local Indian investors for almost two decades and is still popular,growth over the last decade has been undermined by the introduction of a commodity transaction

15、 tax and the silver price crash after 2011,which resulted in widespread losses for investors.Finally,the India International Bullion Exchange(IIBX),which opened in August 2022,is likely to play a key role in Indias precious metals ecosystem.The exchange aims to introduce greater transparency through

16、 uniform pricing and better traceability of metals across the supply chain.While the exchange currently only permits gold imports and trading through spot contracts,silver is expected to be allowed once the systems and processes relating to gold have been streamlined.2.Physical InvestmentIndian phys

17、ical investment grew strongly in the decade before the pandemic,rising from 25.7 Moz(800t)in 2010 to 56.5 Moz(1,757t)in 2019 before the COVID-19 induced weakness in 2020 and 2021.Last year,bar and coin demand jumped to 79.4 Moz(2,470t),the highest total since 2015.Since 2010,investors have bought ar

18、ound 730 Moz(22,700t)of silver.This phenomenal increase has reflected the largely bullish price expectations held by Indian investors,which in turn has encouraged them to take advantage of low rupee silver prices.Furthermore,the Indian governments ongoing tough stance towards unaccounted money and t

19、he increased vigilance on gold transactions have benefited silver as investors have moved out of gold and in favor of silver.Another important driver has been the arbitrage between silvers spot and futures prices in India.This is typically between 4-6%,but at times reached 10-15%between 2013-16,befo

20、re spiking again last year.Our estimates suggest that the volume of silver locked in these trades was around 7 Moz(200-250t)in 2022.Over the last decade,the only years to witness investment demand fall were 2016 and during the pandemic in 2020(which saw disinvestment during the second half),when coi

21、n and bar purchases weakened sharply.This partly reflected the jump in silver prices in these years,which led to widespread profit taking.In addition,the governments ever tougher clampdown on unaccounted money and greater vigilance towards high value cash transactions undermined demand from high-net

22、-worth(HNW)investors during 2016,who had often bought 15kg and 30kg bars as a means of“parking”their unaccounted income.Indian Physical InvestmentSource:Metals Focus0204060801001202010 2012 2014 2016 2018 2020 2022MozIndian Silver Investment5January 2023In India,silver consumption including investme

23、nt is dominated by rural and semi-urban areas,a reflection of the relatively low entry price.Furthermore,even fabricators and wholesalers buy silver as an investment during periods of low prices to be later converted into jewelry or silverware,or just to sell back when the price is high to take prof

24、its.Given the profile of investors,physical silver investment has so far been largely immune to competition from other asset classes,such as equities.That aside,price expectations remain positive among both consumers and the trade,which leads to bargain hunting when the price falls close to key leve

25、ls(for example,near to,or below Rs.50,000/kg)in the domestic market.This emerged in 2022 as the price weakness led to a surge of bullion imports into India.Last year,imports totaled 304 Moz(9,450t),comfortably surpassing the 2015 record of 260 Moz(8,093t).That said,growing urbanization,financial lit

26、eracy and competition from other asset classes do pose a threat to physical investment,especially for bar demand in the coming years.Looking at the coin market,this sector has increased dramatically,from just 1 Moz(30t)in 2010 to 11.3 Moz(351t)in 2019 before falling sharply in 2020 and 2021 as a res

27、ult of the pandemic.Unlike the bar market,coin demand is largely insulated from price fluctuations.This largely reflects the two main factors driving coin demand in India,gifting and religious purposes.Popular coin denominations are 5g,10g,20g,25g and 50g.While silver coins have historically been us

28、ed for gifting,better marketing and product offerings by mints and refineries in recent years have benefited demand.Apart from weddings and Diwali,which were the traditional drivers for silver coin demand,gifting during festivals including Raksha Bandhan and key events,such as the birth of a child,a

29、nd housewarming,has pushed coin demand higher in recent years.We expect the gifting market to grow further as incomes rise.3.Exchange-Traded ProductsSilver ETPs in India are a recent development,with the first product only launched in September 2021.According to current regulations,these have to inv

30、est at least 95%of their net assets in silver and silver-related instruments;the benchmark for these ETPs is the London Bullion Market Association(LBMA)daily silver price.Given that gold ETPs in India have been present for more than a decade,it was quite surprising that silver ETPs were perhaps not

31、introduced earlier.In part,the apparent lack of interest in launching a silver ETP in the past reflects the nature of Indian silver investors.This was covered in the Physical Investment section,but in brief this is mainly due to the fact that investment is dominated by rural and semi-urban areas.Fur

32、thermore,silvers high price volatility deterred Indian fund houses from launching ETPs.Even so,with the pandemic boosting online trading across asset classes and younger investors increasingly less averse to buying risker products,silver ETPs are likely to gain traction as the market matures.Indian

33、Bar&Coin Demand0204060801001202010 2012 2014 2016 2018 2020 2022MozBarsCoinsSource:Metals FocusIndian Silver Investment6January 2023At present,there are seven ETPs and five silver ETP Fund-of-Funds(FoFs)available to Indian silver investors.A FoF is a pooled investment fund that invests in other type

34、s of funds.In India,while trading in ETPs requires a Demat account(short for a Dematerialization account,which is used for trading and holding securities,stocks,shares,bonds,etc.,in electronic form),this is not the case for investing in a FoF.This is significant because it makes it that much easier

35、to invest in a FoF.About 10%of the population have a Demat account,so an FoF caters to a much wider population.As of end-2022,silver ETP holdings in India stood at an estimated 8 Moz(250t)and,given that the funds were only launched in September 2021,this represents a solid start.Importantly,with lea

36、ding fund houses offering these products,the potential for holdings to grow is encouraging.Furthermore,with increasing participation in financial markets and a growing risk appetite,Indian fund houses have over the last few years launched multi-asset funds,which can also potentially now include silv

37、er.While silver ETPs have seen a relatively positive response in the first year,it remains to be seen if they can build on this performance.This is important given the performance of gold ETPs in India,which were first introduced in 2007,but are yet to see meaningful participation from Indian invest

38、ors.Even though total gold ETP holdings in India have doubled since the pandemic,they still remain below 1 Moz(30t).Our research suggests that one key factor undermining growth in commodity ETPs is a lack of investor awareness.That apart,compared to equity ETPs,gold and silver ETPs tend to come with

39、 a higher expense ratio(0.2%for equities vs 0.5%for gold/silver).To briefly explain this,the expense ratio is the annual management fee charged by a fund house to investors.A higher expense ratio also leads to a more sizable tracking error(the difference between the performance of the fund and that

40、of the benchmark)in these funds.A higher tracking error thus undermines the return on investment and is a key reason why Indian investors have traditionally preferred physical investment in gold and silver over ETPs.Furthermore,given that silver fabricators and bullion dealers themselves are big inv

41、estors in silver(as mentioned earlier),ETPs are not a medium through which they will choose to invest.Looking ahead,there are still several reasons why there could be greater interest in ETPs.First,given silvers lower price and generally positive price expectations in India,last year saw many large

42、fund houses actively promote silver ETPs.With investors increasingly comfortable with investing in equity mutual funds(as shown by the growth in mutual fund accounts over the last six years),the positive spillover into commodity ETPs should emerge as fund managers see them as a means for portfolio d

43、iversification.Silver ETP Demand166282261677592Aditya Birla Sun Life Silver ETFAxis Silver ETFDSP Silver ETFHDFC Silver ETFICICI Prudential Silver ETFNippon India Silver ETFAUM(in Cr.)Source:AMFI,Value ResearchIndian Silver Investment7January 20234.Digital SilverIn keeping with silver ETPs,digital s

44、ilver products have also been recently launched in India,although they have so far failed to gain traction among retail investors.By way of some background,digital silver provides investors with the option of buying silver for as little as Rs.1 or 1g,depending on the platform.This is then stored in

45、insured vaults by the seller on behalf of the customer who has the option to either sell it back on the same platform or take physical delivery in the form of coins or bullion(after paying delivery and minting charges).At present,there are around nine companies offering digital silver.Several factor

46、s that have hampered the success of digital gold products also apply to silver.To provide some context,digital gold was launched in 2018 and it was not long before several platforms started offering this option to investors.Some of the biggest digital payment wallets and platforms,such as Paytm and

47、G-Pay,launched these products along with several securities brokers,such as HDFC Securities and Motilal Oswal.However,the combined volume of gold held by investors on these platforms has never exceeded 0.3 Moz(10t),and at present stands at around 0.2 Moz(6t).The lack of traction reflects an absence

48、of clear regulations.This affected a similar product,e-gold and e-silver,which launched in 2011 on the National Spot Exchange Limited(NSEL),but failed as the exchange was forced to close due to irregularities(such as producing fake warehouse receipts).As it stands,even though existing digital produc

49、ts appear secure,due to the presence of custodians and physically-backed metal,there is no oversight from a financial regulator,such as the Securities and Exchange Board of India(SEBI).While there are consultations in this regard,this is a key issue to address from an investor standpoint.Despite the

50、 convenience and ease offered by such platforms,there has been little emphasis on marketing to try and lift investor participation.This reflects the relatively small contribution of the digital gold business to the overall revenues of the platforms and companies offering these products.That said,mor

51、e recent players in this space are marketing more aggressively,but targeting just the small or low-ticket investor whose average monthly outlay is less than 2g of gold and is otherwise not well versed with complex financial products.While this works to boost penetration among low-income groups,this

52、is unlikely to meaningfully boost volumes on digital platforms.At this rate,it will take a critical mass of small investors to start investing in digital gold and/or silver for volumes to become more noticeable.The other issue relates to the fungibility of these products.For instance,many started wi

53、th the aim of allowing their gold holdings to be exchanged at a jewelry store,but a mechanism to allow this was never successfully implemented.The key barrier was how to apply the Goods and Services Tax(GST).For a retail customer,a 3%GST is applicable when buying gold or silver,either digitally or a

54、s a physical bar or coin.Given that a significant Alternative Precious Metals Investments in IndiaNote:*Metals Focus EstimatesSource:RBI,AMFI,World Gold Council,Metals Focus0246810MozIndian Silver Investment8January 2023amount of gold in India is bought to be later converted into jewelry,the custome

55、r pays another 3%GST while doing so.While businesses can secure a GST refund against their sales,there is no mechanism to offset the GST paid by individuals.This effectively leads to a double tax burden for the retail investor,which is a key detriment for gold and silver investment.This has particul

56、arly impacted both gold(given the high value of the transaction)and digital products disproportionately as physical gold or silver can be bought for cash without an invoice.That aside,retailers,bullion dealers and refineries have,over the years,reduced their buy:sell spreads considerably.This contra

57、sts with the spread offered by digital players which is still relatively high(2-3%)and so has discouraged customers.Looking ahead,while interest in digital silver seems modest,stronger marketing,especially promoting these products as accumulation plans,can boost investor interest in digital silver.G

58、iven that it is far more difficult to store silver compared to gold,digital offerings offer an interesting selling point in terms of convenience,storage and insurance.5.FuturesFirst launched in 2003 on the Multi Commodity Exchange(MCX),futures trading in silver has a reasonably long history in India

59、.It first saw a phenomenal increase after the 2008 financial crisis.In 2011,as silver prices soared,trading volumes on the MCX for all silver contracts combined(30 kg,5 kg and 1kg)touched 118m contracts.While actual delivery volumes are tiny(typically less than 1%for any given contract),silver futur

60、es have provided an important avenue for investors,speculators,and the trade to participate in silver price rallies.From an investors perspective,exchange-traded futures were especially popular during 2009-2013 as they afforded investors the opportunity to gain from the silver price rally by committ

61、ing a small margin(around 5%)compared to the 100%capital outlay required to invest in physical metal.Importantly,the exchange has also provided an opportunity for investors to earn a yield via spot-future arbitrage.These trades are more popular among professional/high-net-worth investors.Participant

62、s tend to benefit from a price discrepancy between spot and the futures contract and so buy silver in the spot market and sell forward on the exchange.On expiry of the contract the silver is delivered to the exchange,which only accepts serially numbered silver bars supplied by LBMA-approved refiners

63、 or other exchange approved suppliers(notably those with the India Good Delivery accreditation).This arbitrage typically generates annual yields of between 5-10%and our estimates suggest that outstanding positions in these trades reached around 6-9 Moz(200-300t)last year.That said,even as overall vo

64、lumes in futures trading are still notable,they have slumped since 2011 after the silver price weakened sharply,leading Silver Futures Contracts0204060801001201402010201220142016201820202022No of Contracts(in Mn.)Note:*as on 3rd January 2023Source:MCXIndian Silver Investment9January 2023to widesprea

65、d losses among retail investors and traders.In addition,as the market matured,investors became more aware of the risks of margin trading and those with genuine interest to invest in silver preferred to do so in bars and coins.To put this into perspective,even as the number of contracts traded on the

66、 MCX fell by 80%between 2011 and 2016,to 28m,retail investment(in bars and coins)more than doubled between 2011 to 2015 when it touched a record 110 Moz(3,435t)before slumping in 2016 to 37 Moz(1,136t),mainly due to demonetization.Activity on the exchange was further undermined from 2013 onwards wit

67、h the introduction of a commodity transaction tax(0.01%applicable on every sell transaction).This impacted jobbing(ultra-short-term trades for small gains),which are traditionally an important contributor to exchange volumes.With the pandemic impacting physical purchases and precious metals witnessi

68、ng renewed investor interest,exchange volumes have recovered since 2020,but still remain 40%below their peak.While futures volumes have suffered,the introduction of options on silver futures has helped lift volumes on the exchanges in the last three to four years.To provide a backdrop,options contra

69、cts on the silver 30kg contract were first introduced in 2018 and later in 2021 on the silver mini(5kg)contract.While the early response to options was relatively subdued,due to the high margins involved with the 30kg product,volumes picked up noticeably last year.This reflects growing interest in s

70、maller contracts,such as the silver mini.This was also driven by the increased interest towards silver in India last year which in turn reflected the level of price volatility and positive price expectations.To put the growth in option volumes in context,from 0.2m contracts in 2021,trading has jumpe

71、d three-fold to almost 0.65m last year(as of end-2022),of which about 43%was accounted for by the silver mini contract.6.Prospects for Silver on the IIBXThe setting up of the India International Bullion Exchange(IIBX)has been one of the most important initiatives in Indias bullion market for many ye

72、ars.To provide some context,in late-2020 India announced the setting up of the IIBX at the Gujarat International Finance Tec-City(GIFT City)in Gandhinagar.The exchange opened in August 2022 with only gold trading permitted on its platform.The IIBX is designed to improve transparency in the local gol

73、d market by introducing a uniform gold price across the country and also provide traceability of metal across the supply chain.Importantly,it will improve access to the yellow metal for jewelers.In this context,the exchange allows Indian jewelers and bullion dealers to directly import gold from fore

74、ign suppliers through the exchange.This marks an important change as currently only banks and nominated agencies can do so.Indian Silver Investment10January 2023In the IIBX though,only market participants whose net worth exceeds Rs.250m,and who have more than 90%of their business under Chapter 71 of

75、 the HS Code system are allowed to directly import gold into India(71 covers a range of gold and silver trade categories).This will allow far more participants to become involved in importing gold and so help reduce the cost of doing so for the likes of jewelers and bullion dealers.This could also e

76、ventually impact the Indian banks which have a market share of 30-40%(including dor and refined gold)and an even higher share of 50-70%for silver imports.As of now,spot contracts have been launched on the exchange,under which bullion depository receipts(BDRs)are traded that are physically backed by

77、gold.The exchange initially accepted LBMA-accredited gold bars,but now also accepts Dubai Good Delivery(DGD)bars.That said,the exchange has so far not seen any meaningful volumes due to various factors such as price disparities,deep local discounts and in general a reluctance from the trade to shift

78、 away from their existing approach to importing gold.To boost volumes on the exchange,in October 2022,the government announced that GIFT City will be nominated as an agency to import 6 Moz(200t)of gold from the UAE under the Comprehensive Economic Partnership Agreement(CEPA).As a result,gold arrivin

79、g under this agreement will also be traded on the IIBX.To provide some background,bullion imports through the CEPA will attract a customs duty which is 1%lower than for other gold imports into India.Currently,refined gold outside the CEPA is subject to a 15%import duty,which will drop to 14%under th

80、is agreement.With respect to silver,we expect bullion imports and trading to eventually be allowed on the exchange.Importantly,if the government allows silver imports under the CEPA to also be routed through the IIBX,shipments through the exchange could jump significantly.This is because,unlike gold

81、 where imports from the UAE under CEPA are capped at 6 Moz(200t)annually(starting from 5 Moz(150t)in 2022 and rising to 6 Moz(200t)in five years),there is no ceiling for silver imports.When it comes to the customs duty differential under CEPA,as with gold,silver imports will initially be levied at a

82、 discounted rate(10.75%normally vs.9.75%under CEPA).Importantly,silver imports through the CEPA will be zero rated in ten years.As such,the customs duty on silver falls by 0.5%in the second year,1%from years three to nine,and 2%in the tenth year,which will bring it to zero.If silver imports via CEPA

83、 are routed through the IIBX,as they are for gold,it is possible that silver trading volumes will eventually be much higher given there is no cap on silver imports and also allowing for the wider duty Indian Silver Investment11January 2023This report is published by and remains the joint copyright o

84、f Metals Focus Ltd and The Silver Institute.Although every effort has been made to undertake this work with care and diligence,Metals Focus Ltd and The Silver Institute cannot guarantee the accuracy of any forecasts or assumptions.Nothing in this report constitutes an offer to buy or sell securities

85、 and nor does it constitute advice concerning the buying or selling of investments.It is published only for informational purposes.Metals Focus Ltd and The Silver Institute do not accept responsibility for any losses or damages arising directly or indirectly from the use of this report.Metals Focus-

86、Contact DetailsAddress6th Floor,Abbey House74-76 St John StreetLondon EC1M 4DTU.K.Tel:+44 20 3301 6510Email:Bloomberg launch page:MTFOBloomberg chat:IB MFOCUSThe Metals Focus TeamDisclaimer&Copyright,January 2023Philip Newman,Managing DirectorCharles de Meester,Managing DirectorNeil Meader,Director

87、of Gold and SilverJunlu Liang,Senior Analyst Simon Yau,Senior Consultant-Hong KongPeter Ryan,Independent ConsultantElvis Chou,Consultant-TaiwanMichael Bedford,Consultant David Gornall,ConsultantJie Gao,Research Analyst-ShanghaiNeelan Patel,Regional Sales DirectorMirian Moreno,Business ManagerErin Co

88、yle,Sales&Marketing AdministratorGhananshu Karekar,Research AssociateNikos Kavalis,Managing Director-SingaporeAdam Webb,Director of Mine SupplyWilma Swarts,Director of PGMsPhilip Klapwijk,Chief ConsultantChirag Sheth,Principal Consultant-MumbaiYiyi Gao,Senior Analyst-Shanghaiagdas D.Kkemiroglu,Consultant-IstanbulDale Munro,ConsultantHarshal Barot,Senior Consultant-MumbaiJacob Smith,Senior PGM Analyst Sarah Tomlinson,Analyst Francesca Rey,Consultant-ManilaCeline Zarate,Consultant-ManilaAdarsh Diwe,Research Consultant-Mumbai