Will Indian Silver Tarnish Buffett's Plans?

Asia's biggest buyers--and hoarders--of silver are selling instead

In the heart of central Bombay, in a small compound surrounded by old residential buildings, stands the city's largest bullion refinery, owned by the Sonawala family. Here, 1,543 pounds of silver bars imported daily from Swiss banks are reduced to smaller ingots. Silversmiths buy the ingots to turn them into the dishes, flatware, coins, jewelry, and foil that merchants peddle in the silver bazaars. According to the Silver Institute in Washington, Indian demand reached 4,040 tons in 1996 and at least that much last year. That's 16% of global demand, making the country the largest silver market on earth after the U.S. Little wonder, then, that the refinery is usually hopping.

STALLED IMPORTS. But in the past two months, work at the refinery has slowed--because of one man half a world away. Until a few days ago, most Indians had never heard of Warren Buffett. They even say his name wrong, confusing it with buffet. No matter. Since last October, when Buffett began buying silver, imports into India have nearly stalled as Indians decided that the metal costs too much. Today, more and more Indians are selling their dishes and jewelry made of silver, which now fetches $7.25 an ounce, 20% above the normal $6. That makes for an interesting match-up: 960 million Indian sellers vs. one billionaire buyer from Omaha. "Tell [Buffett] he can't last," thunders dealer and refiner Mukul Sonawala. "Indians say the price is too high. They're saying: `Mr. Buffett, have your buffet, we'll wait till the price drops. Good-bye."'

If Sonawala is right, India could put downward pressure on the silver prices that Buffett has driven up. A walk through Bombay's normally crowded silver market certainly shows that few are buying. During this auspicious time of year for Hindus, when the stars are properly aligned for weddings and coming-of-age ceremonies, merchants normally ring up their biggest sales of silverware, coins, and statues of religious deities. But this year, the silver shops are deserted. Not even the usually free-spending overseas Indians can be spied striking a deal.

Instead, at top shops such as Bherumal Shamandas and tony Tribhovandas Bhimji Zaveri, customers are coming in to sell their silver dinner services. They either pocket the cash or invest the proceeds in gold, which is trading below $300 an ounce. According to M.L. Damani, president of the Bombay Bullion Assn., Indians sold 1.7 tons of silver in just three days in early February.

SAFETY NET. Unlike the rest of the world, where silver is used mostly for electronics and photographic materials, the use of silver in India is predominantly personal. Indians consider silver and gold a form of personal security in a nation that provides no social safety net for its citizens. Consequently, a silver item is the first purchase from savings. Indians wear silver jewelry, embroider silver threads into clothing, worship idols made of silver, and eat off of silver plates. They even consume an estimated 132 pounds of silver a day in the form of a gossamer-thin foil that covers desserts or gets ground with tobacco.

Indians' use of silver is so extensive that dealers here feel little need for knowledge of the international markets. Even now, just a handful of silver dealers know anything about Warren Buffett's current play; some even mistakenly think the high prices mean the Hunt brothers are up to their old tricks.

But if India holds the key to silver-market trends, Buffett should take heed. The Bombay Bullion Assn. says that if the price of silver continues to ride at more than $7 an ounce, Indian demand could fall by 40% this year, driving the price down to $6.50. Almost all of the 110,000 tons of silver stock in India is held by private citizens, squirreled away in iron safes and cupboards. So Buffett's calculations could be drastically upset if Indians start unloading all that tonnage. Bombay bullion dealer Sonawala jokes that if that happens, Buffett, like the Indians, may have to consume some of his 4074 tons of silver himself to keep prices up. That would be some buffet.

Before it's here, it's on the Bloomberg Terminal.