In the aftermath of the Shanghai exchange's margin hike and trading band increase reported previously, a pair of articles from Bloomberg and the FT looks at the trading of silver in China, where the mostly retail-traded metal continues to be seen as an inflation hedge. From Bloomberg: "Silver trading in Shanghai, which jumped 65 percent in terms of volume last month, will continue to increase on demand for a safe-haven investment, even as the government moves to curb volatility and speculation." And since China's inflationary concerns are unlikely to go away soon, it is only natural that domestic hedging, mixed in with some wild speculation, will continue: "“Chinese investors have piled into silver as one of the investment choices to hedge against rising inflation,” Shi Heqing, silver analyst at Beijing Antaike Information Development Co., said today. The government’s move to increase margins in an effort to curb volatility won’t affect buying interest in physical material, Shi said." Sure enough volume has exploded: "Volume on the Shanghai Gold Exchange rose to 33,293 metric tons in April, up from 20,206 tons the previous month, according to data from the exchange, the main bourse in China for trading silver." The FT provides another look at the unprecedented surge in silver trading in Shanghai: "At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data. The number of contracts outstanding, an indicator of investor exposure, doubled over the same period." In other words, while in the US it is mostly gold that is a pure inflation hedge at both the retail and institutional level, in China, where runaway inflation is running far higher than here, silver is the primary means to cut inflationary exposure. Therefore, nothing short of a full on deflationary episode in China will do much if anything to have a long-term impact on the price of silver.

More from the FT:

The surge in silver prices has attracted investors the world over, from China and India to the US, where the metal has become the investment of choice for Americans distrustful of the actions of the government and central bank. Silver’s stunning rise has inspired a rash of conspiracy theories as investors and analysts struggle to explain the speed and scale of the rally.



Silver trading in Shanghai remains below the levels in London and New York, the two main global hubs, but its rapid growth means its has become increasingly significant in driving prices, bankers said. Turnover in New York silver futures, the most liquid futures contract in the metal, averaged about 700m ounces a day in April.



“I’m pretty certain it’s the Chinese retail [investment] that is driving this move,” one senior precious metals banker said. “There’s an enormous amount of speculation going on out there, they’ve got the bit between their teeth.”



Ms Tully said Chinese investors cut their positions in silver sharply last week as prices tumbled, before returning to the market early this week and driving a short-lived rebound in prices. “No less than during silver’s swift ascent, [Chinese] agency was very evident in its tumbling descent.”



Whether Chinese buying continues “will be a major determinant of whether silver can finally take out $50”, she added.



Ivan Glasenberg, chief executive of Glencore, the commodity trader that plans to float this month, dismissed the drop as “froth” being flushed out of the market, saying that supply and demand fundamentals remained strong.

Of course all of this may just be a dress rehearsal for the big show. As reported before, on May 18th the Hong Kong Merc will start a domestic version of our own Comex. And if speculative froth was heavy now, just wait until this is launched.