Silver Prices and India’s Monsoon Season

By Melissa Pistilli - Exclusive to Silver Investing News

The precious metals buying season has started in India, the world’s largest consumer of gold and fourth largest consumer of silver. Both metals play a significant role in the nation’s cultural festivals as well as the wedding season, a factor that greatly influences the seasonal price movements of gold and silver.

As any knowledgeable silver buff will tell you, the white metal’s strongest rallies of the year are usually in autumn and winter (2008 being an anomaly, of course). According to the seasonal analysis Adam Hamilton of Zeal Research conducted for the period between 2000 and 2009, “between early September and early December, silver tends to rally 11.4 percent higher on average.” After a dip in early December, “on average over the last decade, silver has surged 13.5 percent higher during January and early April.” Hamilton found that, statistically speaking, the best months for silver prices are November, January, February and May when “4 percent to 5 percent gains can be expected.”

The 2010 autumn and 2011 winter gains in silver were quite impressive, with silver rising steadily from about $19.50 an ounce to $30.50 an ounce between early September and early December and from around $31 an ounce in January 2011 to $50 an ounce by late April 2011.

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Indian buying season dependent upon the monsoon season

However helpful seasonal charts may be in determining the correct course for your investment decisions, “seasonals are merely secondary drivers of prices, tailwinds or headwinds,” Hamilton warns. A multitude of other factors can influence price movements in a given period.

An important factor to consider in making projections about silver prices for September through April is an agriculturally healthy or poor monsoon season in India, where approximately 70 percent of gold and silver is purchased by rural farmers. The country is one of the world’s biggest producers and consumers of crops.

Cultural beliefs in the rural areas lead farmers to invest their money almost entirely in precious metals rather than hold it in a bank account. “They don’t trust banks, they trust their jeweler,” said Bhargava Vaidya, bullion expert and director of B.N. Vaidya & Associates, in a Wall Street Journal article earlier this year.

Preferring to buy jewelry, coins and bars, more and more farmers are turning to silver as an alternative to gold as prices for the yellow metal surge higher and higher.

“Silver coins and bars have a very significant meaning to the rural community. We know of farmers who buy silver bricks in several kilos and lay them at a not-so prominent spot in their field, praying for a good harvest,” said bullion dealer Tanna Ghosal, Shivom Seth of Mineweb reported last month. The buried silver becomes the harvest if the following year brings a poor monsoon season.

The June-to-September monsoon season is crucial for staple Indian crops including corn, cotton, rice, soybean and sugarcane as nearly 60 percent of farms depend on monsoon rains for irrigation. Too little rainfall means lossed crops and less money for farmers to invest in gold and silver, which could significantly impact prices in the months of January through April, and even in September through December as the markets anticipate falling demand from this region following a disappointing monsoon season.

“Last year the monsoon was excellent,” said Prithviraj Kothari, president of the Bombay Bullion Association, leading to surging Indian demand for gold and silver in the winter months.

The healthy monsoon season in 2010 was followed by record grain production in 2010-11 for an estimated total foodgrain production of 241.56 million tonnes, up 5.4 percent from the previous season.

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Healthy monsoon season for 2011

Early in the season, there were concerns this year’s monsoon rains would be too far below normal to yield healthy crop levels, ultimately leading to depressed silver and gold demand from India’s farmers.

However, August has seen periods of substantially heavy showers, and although rainfall for the week ending August 24th was reportedly 8 percent below normal levels, officials at the state-run India Meteorological Department told Reuters that “next week’s rainfall is expected to be either normal or above normal.” As of August 18th, India has experienced rainfall levels of 11 percent more than normal for this season.

The monsoon season has also had a wide distribution pattern meaning crops are healthy across India, leading the Agriculture Ministry to project a bumper harvest for the 2011-12 crop year.

We’ll now have to wait until the winter months in 2012 to see if that healthy crop season translates into robust demand for physical silver from India’s rural farmers, contributing to a strong price rally in January through April of 2012.