MUMBAI Soaring silver prices are driving Indians to recycle jewellery into bars as an easier, more reliable way to invest, a trend that will limit imports of the metal in the world's fourth largest consumer.
Problems over storage and quality make silver bars more attractive than jewellery such as bangles.
Global silver prices have risen by nearly half this year to 31-year highs, after a gain of more than 80 percent in 2010, far outpacing gains for gold where India is the world's top consumer.
"People are diversifying their portfolios," said Suresh Hundia, chairman of Mumbai-based silver trader, Hundia Exports, one of the country's largest private silver refiners.
"Now they have to have silver in their portfolios."
But the rising demand was unlikely to mean higher imports, he added.
"Imports will remain steady at last year's level. Lots of silver has been coming from recycling. Though demand for bars has risen sharply, consumers are not buying silver jewellery."
Indian investor demand pushed up annual silver imports By 136 percent last year to 3,030 tonnes, but this came off a low base in 2009, when a drought hit farmers' incomes, metals consultancy GFMS says.
Silver imports hit a record high of 5,048 tonnes in 2008, GFMS data shows, before slumping to just 1,285 tonnes in 2009. India depends on overseas supplies to meet about 70 percent of its consumption, more than half of which goes into jewellery and silverware.
Although prey to the vagaries of the weather and prices, imports in 2011 could rise by 10 to 15 percent, Prithviraj Kothari, president of the Bombay Bullion Association (BBA), estimated.
"Silver imports could rise by 10 to 15 percent in 2011, but a lot would also depend on the monsoon, volatility and prices," he said.
Silver recycling from scrap has risen sharply in the south Asian nation. Supply of silver from recycling was 558 tonnes in 2010, a jump of nearly 2.8 times from the 2001 figure of 200 tonnes, GFMS data showed.
PURITY, STORAGE CONCERNS
This year, India has imported 400 to 500 tonnes of silver since January, the BBA says, down from 600 tonnes a year ago.
Strong investment demand has prompted MMTC, the country's largest bullion importer, to almost double its planned silver purchases in the financial year ending in March 2011.
Gold has traditionally been the most popular precious metal investment in India, where brides are often weighed down by their jewellery in a display of wealth and status. Farmers in remote villages use bullion in the absence of banks for savings.
But Indians have also been buying silver for years as jewellery and silverware, even though concerns over the precious metal content in such items has made it hard to maximize resale values and the metal's lower value created storage problems.
"Buying silver is not as easy as gold. Purity concern forces investors to buy bars instead of jewellery. For large investors storage is an issue. If someone is buying 50 or 100 kg of silver, where will he keep it?" asked Harshad Ajmera, proprietor of JJ Gold House, a wholesale in the eastern Indian city of Kolkata, which sold 5 tonnes of silver last year.
Silver that is not stored properly will tarnish and turn black, reducing its resale value. And at a price of 69,000 rupees per kg, some big investors use labourers to carry the bars to storage facilities, one Kolkata-based jeweller said.
The sparkle of silver has also caught the eye of banks, which are India's primary dealers in bullion. The government allows about 21 banks and a few state-run trading agencies to import precious metals.
"We have a silver licence in place. We would start trading based on the response from customers," said an official from a state-run bank in Mumbai, the country's financial capital.
Silver is also used in electronics, so it has some of the attributes of an industrial metal such as copper, keeping it mainly the preserve of large investors until recently.
But its potential high returns and cheap entry price versus gold are alluring to retail investors. "Six to eight months back only big players were investing in silver," said Ghanshyam Nichani of Dhanraj Jewellers based in Mumbai. "But now the common man has started investing in silver. He is buying a kilo, two kilos, depending on his ability."
Ajmera of JJ Gold House agreed. "Last year we saw a large amount of money flowing into silver from big players. They are waiting for a correction. But the common man is now entering into the market. He is buying bars instead of jewellery," Ajmera said. With storage and quality a problem, investors are also turning to silver-based funds to lock in returns minus the headaches.
ETFs can be traded like shares and are backed by physical silver. Holdings of the largest silver-backed ETF, New York's iShares Silver Trust , rose to a record high of 11,390.06 tonnes by April 25.
"Everyone can't buy silver from the physical market and store it at home. There is scope for silver exchange-traded funds," said Harish Galipelli, vice-president with JRG Wealth Management, although he did sound a cautionary note.
"A few investors are not comfortable in entering into the market at current levels."
(Editing by Jo Winterbottom and Clarence Fernandez)