In a move that will make the silver market more liquid, the Shanghai Futures (SHFE) has begun trading in silver contracts. The contracts are expected to be bullish for silver prices, with traders stating that it could make market manipulation more difficult.

Although the country is a main producer and consumer of silver, it has remained on the sidelines in silver trading. By initiating silver futures, traders say China clearly wants more control over the precious metal’s pricing policy.

Chinese investors have been showing an increasing interest in the white metal amidst surging inflation and the sluggish performance of the stock and property markets. In March, about 134 billion yuan ($21 billion) in silver contracts were traded, more than 15 times the amount traded two years ago. More than gold, many retail investors prefer silver because the minimum requirement for investing in it is much lower in China.

The white metal is imbedded in the Chinese psyche. For long, it has been the basis of China’s currency. In 1935, the Shanghai-based biweekly Finance and Commerce reported personal hoards of the precious metal at 1.27 billion ounces.

With the Shanghai Futures Exchange gaining approval to begin trading silver futures, traders insist a significant shift appears to be in the making.

Wang Ruilei, an official with precious metals trader CGS Company told newswire agencies that the market would be bigger and more liquid with the advent of the futures contracts. Traders added the futures exchange would provide direct access to silver for Chinese investors.

It would also be beneficial to silver enterprises and industries as the metal would now be available for trading, hedging and buying at their local exchange and in the local currency.

Huo Ruirong, vice manager of the Exchange was quoted by newswires as saying that the new trading option would provide China with a pricing mechanism on silver and help readjust the silver industry structure.

This is at a time when China is believed to have exceeded Peru and Mexico to become the world’s leading producer of silver. The country is also the second-largest consumer of the precious metal after the United States.  It is also, of course, now the world’s leading producer of gold too.

Regulators in China are hoping to see more than just investors benefit from this new trading vehicle. At the inauguration ceremony, Liu Xinhua, Vice Chairman of the China Securities Regulatory Commission, pointed out that this year, they were keen to implement the spirit of Premier Wen Jiabao’s 2012 missive to “secure introduction of …commodity futures and financial derivatives, in order to enhance our overall competitiveness and meet the real economy needs to provide more tools and instruments”.

He said the silver futures market would be conducive to optimising the silver price formation mechanism and provide low-cost, efficient means of risk management.

Liu Xinhua stressed that the silver futures play, from the listing to mature and play features, would require a gradually cultivated stance, and was no overnight decision. He added the move would help the Shanghai Futures Exchange strengthen market surveillance and effectively guard against market manipulation and other illegal activities.

INVESTMENT INTEREST

Investment in silver has been booming in China. An early indication was the trading volume of silver forwards on the Shanghai Gold Exchange, China’s only exchange for the precious metal, which surged 751% in 2010 as compared to a year earlier. Also, the volume in September last was more than six times that of the same period in 2010.

There already has been a marked increase on the Shanghai Gold Exchange, where the silver turnover has soared, averaging about 1,300 metric tonnes daily. In a briefing to its clients last week, Union Bank of Switzerland (UBS) said it was a notable improvement as this was the first time since December last year that the five-day moving average volume was consistently above 1,000 tonnes for nearly two weeks.

UBS told its investors that the additional platform for trading silver in China, with the silver exchange, could well have rekindled investor interest, offering the possibility of arbitrage opportunities, particularly given the added incentive of relatively cheaper margin requirements on the exchange.

Data showed on the first trading day of the exchange, the benchmark listing price was $979.77 per kilo ($30.47 an ounce). According to statistics released by the Exchange, the first batch of eight listed futures contracts received the accumulative amount of 349,100 hands (contracts).

The contracts are to be traded in yuan. The price fluctuation is set to be limited to 5% per day, while the minimum margin requirement is 7% of the contract value. By the end of the first day, the daily transaction volume was about 260,000 hands.

Commodity futures exchanges transaction data found that silver futures turnover has risen over the past 2 weeks and is just behind copper trading.

Commercial banks are also said to be getting in on the act.

In August last year, Industrial and Commercial Bank of China Limited, China’s biggest lender, launched paper silver trading for individual investors. Other banks followed suit. The trading volume of Industrial paper silver products reached 300 tonnes within six months, almost four times the figure for the whole of 2010.

Though Barclays Capital had earlier noted in a research note that silver prices are to remain volatile, and that Chinese silver imports were down about a third for the year up to April, traders said Shanghai futures trading could mean additional investment demand for silver, in a similar manner to investor interest in gold.

This would also initiate movement from some Chinese concerns who are keen to pick up silver projects and companies abroad, as they have been doing with gold deposits and companies, said traders.

Mineweb – May 28, 2012