Indian Rupee vs. Silver

By: Dr_Jeff_Lewis

Investors shouldn’t forget one of the best sources of demand for silver and gold—India.  Gold was always a historically important commodity in India, where it’s seen as a store of wealth.  Silver, on the other hand, rose mostly as a necessary “poor man’s” entry into precious metals, which have risen far faster than wages in most of the emerging market economies.

Silver investors should watch the relationship between silver and the Indian currency, the Indian Rupee.  Because India is a source of demand for silver, and silver is mostly priced in major market currencies, the rise and fall of the Rupee can create large swings for silver.

The past year proves the relationship between silver and the Rupee.  As the Rupee moved higher in fall 2010, so did silver.  In January, the Rupee gave up ground, and silver followed.  The response could be attributed to some asset reallocation in the United States, but later price movements cemented the relationship.

The Rupee’s value peaked at the same point as silver in 2011.  In April and May, the Rupee reached its highest value for the year, and silver tacked on an impressive gain of more than 130%.  At this point, the Rupee had risen only 3.3% against the dollar.

Year over year, the Indian rupee is now down 3% against the dollar, and silver followed, giving up some of its gains to post a return of just over 94% for the year.

Emerging Markets on Fire

Emerging markets are an excellent source of investment demand for silver.  Seeing as inflation is as high as 10% in China, depending on the source, and just under 7% in India, emerging market workers have to hedge their bets with precious metals.  The equity and debt markets in most emerging market nations are still under development, and some nations restrict ownership of public stock only to the wealthiest classes in their respective geographic areas.

However, gold and silver are free; they can be purchased and owned by anyone.   As the financial markets are democratized and smaller futures contracts trade in new lands, the emerging markets will provide a new source of demand.  Since 2003, wages in the emerging markets have risen no less than 9% annually, a growth rate which is indicative of inflation, but also the reality that more production (and jobs) are flowing into markets where gold and silver are common investment vehicles.

Given that the Fed is now positioned to enact another round of quantitative easing, and the possibility of a complete reversal in employment trends is just about zero, the emerging markets should provide for a long-term source of investment demand.  Investors in the developed world should realize that while silver and gold remain far from mainstream compared to other asset classes, gold and silver are mainstream in the places where jobs are fleeing and wages are rising.  If investors add in the reality of emerging market inflation, it makes little sense to avoid the emerging markets on the basis of an economic slowdown.  The short-term ebbs and flows are certain, but the long-term trend is toward a lower dollar value against every world currency, and higher prices for silver and gold.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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