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The Rediff Business Special/Syed Firdaus Ashraf

Buffett's silver spree is hurting Indian business

Ever heard of an India-Australia match being a silver lining in the day of a moneyed trader? Meet Deepak A Kewalramani, silver merchant in Zaveri Bazaar, Bombay's "24 carat" precious metals market.

A professional silver trader, he is not alone in Zaveri Bazaar. Like him, there are many others who have lost customers ever since the price of silver jumped by almost 60 per cent. Reason: the sudden buying spree by billionaire Warren Buffett.

"Warren Buffett?" says Kewalramani, "I have heard of this name. About him, I know only that he is buying silver at high prices and has stocked nearly 20 per cent of the silver stocks in the world."

Be it Kewalramani, Assandas, or Atulbhai sitting in their shops in the congested lane of Zaveri Bazaar, south Bombay, all of them hope that the price of this precious metal will come down. Silver prices began to fall from last October when Warren Buffett of Berkshire Hathaway Inc started buying this precious metal in the international market and hoarding it.

Says Kewalramani, "Today, the price is too high and as a result of which, there is no demand for silver in the market. I am planning to shut down my silver operations and start a business in gold since that is more profitable. I now keep a television in my shop and watch cricket matches to pass my time, waiting for my entire stock of silver to be sold out."

The Indian market for silver is the second largest in the world, after the United States, estimated at over 4,000 tonnes per year. India imports nearly 3,500 tonnes of silver every year. But after the sudden price hike, demand for silver has dropped and silver traders believe the country will not import more than 2,000 tonnes this year.

Buffett has been buying and collecting silver, hoping to gain a monopoly on the commodity which he believes will be in short supply for future needs. Silver stocks are limited and production has consistently failed to meet demand over the years. The reclusive billionaire -- the second richest man in the United States after Bill Gates -- has bought up to 111.2 million ounces of silver so far, worth about $ 600 million.

And as a result, silver which used to cost Rs 6,865 per kg in September in India is today priced at Rs 8,900 per kilogram in the Indian market.

Says Atulbhai Choksi, another silver merchant, "Last year, in this month, there used to be hordes of people buying silver. But today, not more than 20 people visit my shop to buy silver ornaments."

Silver is India's third largest import, after oil and gold. The demand can roughly be divided into a third from photographic film and paper manufacturers, another third from producers of jewellery and silverware, and the rest from a broad range of industrial applications, including electrical, electronics, batteries, mirror etc. Unlike America where silver is a primary need in industry, in India, silver is an important jewellery item, after gold, at Indian weddings and also as a solid investment.

Says M L Damani, president of the Bombay Bullion Association Ltd, "The major buying of silver in India is in the month of April-May, during the wedding season. And in the month of June, during harvest time, many farmers buy silver."

The Western media is projecting Buffett's silver purchase as a war between him and the Indian silver traders, and are comparing the situation with the infamous Bunker Hunt case of the 1970s. However, Indian silver traders feel it is too early to judge the present situation vis-a-vis Buffett or compare it with Hunt.

Bunker Hunt, a billionaire, began purchasing silver in the mid-1970s in forward trading, forcing the price of silver up to $ 50 an ounce. This in turn saw Indians selling their stock in huge amounts (until a nervous Government of India banned exports), dropping the price of silver in international market and pushing Hunt into bankruptcy.

Damani points out an interesting difference between the two situations. "In the 1970s, the export of silver was permitted from India, and that caused the bankruptcy of Hunt. But today, exports are not allowed, so Indians cannot sell silver in the international market. That is why I feel Indian silver traders cannot harm Buffett in any way."

Exports have been banned since 1986. According to figures available at the Bombay Bullion Association Ltd, there is nearly 119,000 tonnes of silver in India.

Adds bullion expert Madhusudan Daga, "During Hunt's time, besides the legal export of silver, Indians also smuggled silver illegally in via Dubai. That led to an excessive supply of silver in the international market leading to Hunt's downfall.

"Moreover, Hunt bought silver on forward trading which pushed the price of silver up to $ 50 an ounce in those days. But Buffett has bought actual stocks," points out Damani.

Another positive factor in Buffett's favour is that Berkshire bought silver worth less than three per cent of the company's consolidated shareholder's equity. And in a release to its shareholders, the company declared that since it has bought silver stock worth only three per cent of its equity, any change in the price of the commodity would not have a material impact on Berkshire's financial condition.

Says Daga, "It is too premature to say that the battle is against Buffett and Indian silver traders (as made out by the Western media). We will have to wait and watch the situation till July."

However, Mukul Sonawala, a major silver trader, feels Buffett cannot hold out for too long against market forces. "If Buffett tries to bring silver to unrealistic price levels, it will fall," he states conclusively.

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