Silver ETP Buyers Defy Hedge Fund Exit Amid Price Slump

September 18, 2014

New York (Sept 19)  Buyers of exchange-traded products backed by silver are betting $11.9 billion that big speculators are wrong about the outlook for prices, which slumped last week to a 14-month low.

ETP holdings are up 1.5 percent since mid-July to 19,898.8 metric tons, nearing a record reached in October, data compiled by Bloomberg show. At the same time, money managers shrank bullish wagers by 95 percent, government data show. To protect against the risk of lower prices, producer Coeur Mining Inc. (CDE) has hedged about a third of its output.

Retail investors who account for 80 percent of U.S. ETP purchases expect long-term growth to spur industrial demand for silver in everything from solar panels to electronics. For now, the commodity is the worst-performing precious metal this year, as a stronger dollar and rallying equity markets erode demand for haven assets including gold. Hedge funds have dismantled bullish positions that in July were the biggest since 2010.

“The increase in dollar value has acted as a hammer on commodities, including silver, and the funds and several investors are selling,” said Michael Cuggino, who manages about $8.5 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “The long-term investors, on the other hand, are holding on to it since silver is a store of value and they look at it as significant metal both from the standpoint of monetary policies and economic activities.”

Precious Metals

Silver is down 4.4 percent in 2014, trading at $18.52 an ounce today and heading for the first two-year slump in more than two decades, while gold rose 1.8 percent and palladium surged 16 percent. Platinum fell 1.7 percent.

A bear market in crops from corn to wheat helped send the Bloomberg Commodity Index of 22 raw materials down 3.3 percent this year, while the MSCI All-Country World Index of equities advanced 4.6 percent. The Bloomberg Treasury Index is up 3.1 percent, and the Bloomberg Dollar Spot Index added 3.4 percent, touching a four-year high today.

The silver slump hasn’t deterred buyers of ETPs backed by the metal. Holdings that expanded 2.4 percent last year even as precious-metals prices plunged are up 2.7 percent in 2014 and this week reached the highest since October, the month when holdings reached a record 20,121.5 tons, data compiled by Bloomberg show. Gold-fund assets are down 3.2 percent this year, after a 33 percent drop in 2013.

“Unlike gold, buyers of silver ETFs are not the momentum players,” said Peter Jankovskis, who helps oversee $3.1 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC. “You will see people holding silver for a much longer period of time compared with gold. Last year, the ETF investors did not flee like you saw in gold ETFs.”

Speculators Exit

As ETPs expand, money managers and other large speculators have reduced their bullish bets on New York silver for eight straight weeks, the longest contraction in 17 months, U.S. Commodity Futures Trading Commission data show. The net-long position dropped to 2,237 futures and options contracts on the Comex as of Sept. 9. That compares with a July 15 position of 46,795 contracts, the most bullish since October 2010.

Demand for precious metals as a protection of wealth has been eroded by the outlook for a strengthening U.S. economy, which helped spark a rally in the dollar as the Standard & Poor’s 500 Index of equities surged to a record this month. The greenback also benefited from concern that growth is stalling in Europe, where policy makers announced more stimulus measures.

Hedging Risk

While mining companies at the end of 2013 had the least amount of silver committed to hedging contracts in a decade, there are signs that some companies are taking steps to minimize the risk of lower prices.

Chicago-based Coeur Mining, which produces about 30 million ounces a year, hedged about a third of its production through the first quarter of next year, Chief Financial Officer Peter Mitchell said in a telephone interview. The company bought put options that allow it to sell silver at $18 an ounce, 2.9 percent below the current price, he said.

Silver has declined even as price swings became more muted. The 60-day historical volatility fell to 14.6 yesterday, the lowest since June 2003, according to data compiled by Bloomberg. Gold volatility is the lowest in almost four years.

“Sentiment remains quite bad in the silver market,” said Mark O’Byrne, a director in Dublin at brokerage GoldCore Ltd., which has more than $200 million in bullion under management.

Better Value

The worst of the slump may be over. Silver probably will tread water, averaging $20 in the fourth quarter and $20.40 next year, according to the median of 12 analyst estimates compiled by Bloomberg.

Retail buyers, who account for about 80 percent of U.S. silver ETPs, are holding onto the metal because they expect increased demand will boost prices, according to Mike McGlone, the New York-based director of research at ETF Securities LLC.

Silver’s appeal has increased relative to other precious metals, according to Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer in Oklahoma City. An ounce of gold buys 66 ounces of silver, compared with a 10-year average of 57.7.

“Buyers see silver as undervalued compared to gold,” said GoldCore’s O’Byrne. “There is a belief that you get more bang for your buck. They are worried that there could be a recession, but they think that industrial demand will remain fairly robust.”

Solar Panels

Industrial demand will rise this year, with the most ever being used in solar panels, while jewelry and silverware makers increase purchases by 4.3 percent, according to CPM Group, a New York-based researcher. About 50 percent of silver goes to industrial items, compared with about 10 percent for gold. The rest is held as investment or jewelry.

Demand is growing for silver used in products including high-efficiency electronics and anti-bacteria applications, Randy Smallwood, chief executive officer of Silver Wheaton Corp. (SLW), said on an Aug. 14 conference call. The Vancouver-based mining company is “very comfortable about silver in the long run,” he said.

Coin sales at Australia’s Perth Mint last month rose to the highest since January, while purchases at the U.S. Mint, the world’s largest, saw an increase in August from a month earlier. Gold-coin sales, on the other hand, have dropped in the last two months.

“Over the last month or so, we’ve started seeing a little bit of a pickup in interest in silver again,” said Tony Dobra, a director at Baird & Co., a precious-metals dealer in London. “Some people still think it’s a little bit undervalued.”

Diminished Appeal

For exiting speculators, the outlook for a stronger dollar and higher borrowing costs have diminished the appeal of precious metals, especially gold, and investors are treating silver more like an alternative currency than an industrial commodity.

Silver’s 30-week correlation coefficient to gold is at 0.82, with a reading of 1 signaling the two moved in lockstep in the same direction. By comparison, silver’s correlation with an index of industrial metals is at 0.28.

Concern about a slowdown in Europe and a supply glut may keep prices muted even as demand is forecast to rise this year. The European Central Bank on Sept. 4 lowered its growth forecast for this year and next.

Supplies are forecast at 977.6 million ounces this year, compared with 971 million ounces last year, according to CPM. Demand will continue to trail supplies for nine straight years, according to the research group.

“I don’t see a lot of people wanting to move into the precious metals,” OakBrook Investments’ Jankovskis said. “The fundamentals of supply-demand are against silver. Supplies are abundant.”

Source:  Bloomberg

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