Gold price retreated after surging to a new consecutive record high yesterday. Currently trading at 1430, the benchmark Comex contract remains firm and is around $10 below the record high of 1441. Following gold's coattail, silver also jumped to a fresh 31-year high yesterday before pulling back today. Renewed geopolitical tensions have increased safe-haven demand. Meanwhile, Fed's preference of staying accommodative despite heightened inflationary pressures has led more investors to precious metals.

The Silver Institute released yesterday results of the retail survey it did last month. Primary findings show that silver jewelry sales hit new records last year. 87% of jewelry retailers said their silver jewelry sales increased in 2010, 52% said their silver jewelry sales increased between 11 and 25% while 28% saw an increase over 25% for an average increase of 23%. Retailers' ratings regarding margins on different jewelry categories are as follows:

  • Silver jewelry: 57%
  • Diamond jewelry: 20%
  • Bridal jewelry: 15%
  • Gold jewelry: 4%
  • Platinum jewelry: 4%

While both gold and silver prices have been rising, the latter apparently outperforms with the gold/silver ratio hovering around 41/42, the lowest level in more than a decade, over the past few days. Indeed, the ratio has been in a downtrend since mid-2010. Persistence and the magnitude of the decline have triggered talks about a structural re-rating of gold and silver prices.

In our report titled 'New Regime for Silver', we mentioned that industrial demand will eventually set the tone of silver prices in the longer-term. We also talked about silver's application in solar energy as a significant demand growth driver. In this article, we would like to see China's influence on silver demand.

Trading activities have been growing worldwide. Investment demands for precious metals are especially strong in the midst of geopolitical tensions and heightened concerns over inflation. Many investors prefer silver to gold as it appears more affordable. Some would like to ride on its industrial characteristics. In emerging markets such as China, inflationary pressures are getting higher. While the government will accelerate monetary tightening measures to curb price levels, it, at the same time, will be cautious and will try not to affect growth. Therefore, rate hikes will be limited. The chart below shows that China's 1-year deposit rate has entered negative territory since early 2010. The phenomenon will continue to some time and should trigger investors to seek investments from hard-assets such as gold and silver.

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China shifted to a net importer of silver from a net exporter in 2007. Industrial demand in the country has been strong and continues to expand, supporting future growth in silver consumption. While it's true that investment demand for has been robust, we believe the uptrend shown in the chart below represents only industrial and jewelry figures according to the ways that China's Customs collects data. The backdrop suggests that China's demand for silver has been strong and has room to expand further.

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