Hedge funds are the most bullish on silver in seven months and investors’ holdings are expanding toward a record on speculation the metal will outperform gold as central banks seek to boost growth.
Wagers on rising prices jumped 10-fold since June, U.S. Commodity Futures Trading Commission data show. Investors bought 717.2 metric tons valued at $797 million through exchange-traded products this quarter, the most in a year, according to data compiled by Bloomberg. Prices will increase for at least the next three quarters and average $38 an ounce in the three months through June, or 9.9 percent more than now, based on the median of 14 analyst estimates compiled by Bloomberg.
If history is any guide, silver will beat gold after the Federal Reserve announced a third round of debt-buying and central banks from Europe to Japan pledged more action. Silver rose about 53 percent in the Fed’s first quantitative easing from December 2008 through March 2010, twice as much as gold, and 24 percent during the second phase ending in June 2011, three times as much. Silver will probably keep beating gold in the next several quarters, Morgan Stanley predicts.
“The recent announcements on the part of central banks really sparked the rally,” said Peter Sorrentino, who helps manage $14.6 billion of assets at Huntington Asset Advisors in Cincinnati. “Silver has now become a two-way play, getting bids both on industrial demand as well as a monetary hedge.”
Silver, used in televisions to solar panels, climbed 24 percent to $34.635 in London this year, beating gold’s 14 percent gain. It is this quarter’s best performing commodity. The Standard & Poor’s GSCI gauge of 24 materials rose 2.4 percent in 2012 and the MSCI (MXWD) All-Country World Index of equities gained 11 percent. Treasuries returned 2.3 percent, a Bank of America Corp. index shows.
Some investors buy gold and silver as a hedge against inflation and a weaker dollar. Inflation expectations measured by the break-even rate for five-year Treasury Inflation Protected Securities rose to the highest since May 2011 on Sept. 17. The U.S. Dollar Index, a measure against six major trading partners, weakened 8.1 percent since the end of November 2008.
The Fed said Sept. 13 it will buy $40 billion of mortgage debt a month and probably hold the federal funds rate near zero until at least the middle of 2015. Precious metals generally earn returns only through price gains, increasing their allure as interest rates decline.
Hedge funds and ETP investors’ bullishness has yet to extend to demand for American Eagle silver coins, a market valued at about $1.4 billion in 2011 based on metal content. The U.S. Mint sold 25.8 million ounces since the start of January, 23 percent less than a year earlier, data on its website show.
Central bankers are increasing stimulus because of concern about growth. Industrial applications account for 53 percent of silver demand. International Monetary Fund Managing Director Christine Lagarde said in a speech in Washington on Sept. 24 that the group sees global growth “a bit weaker” than it had forecast in July. The fund expected growth of 3.5 percent this year and 3.9 percent in 2013.
“The slowdown impact is not over as yet for industrial metals including silver,” said Dan Denbow, a fund manager at the $2.1 billion USAA Precious Metals & Minerals Fund in San Antonio. “The money coming in today because of all the easing will not impact the economy for six months or so.”
Weaker industrial demand would leave investors with a bigger glut to absorb. Production will exceed consumption for a fifth year in 2013, leaving a surplus of 5,095 tons, Barclays Plc estimates. Higher prices may also encourage more recycling. Scrap supplies jumped 10 percent in 2010 as prices almost doubled, according to Barclays.
Silver imports by China, the second-biggest user after the U.S., reached a one-year high in August, customs data show. The nation’s growth will accelerate to 8.5 percent next year from 8 percent this year, the International Monetary Fund estimates.
Hedge funds raised their net-long position to the highest since Feb. 28 in the week ended Sept. 18, holding a combined 30,986 futures and options, CFTC data show. Investors now own 18,601.4 tons through ETPs, or 0.2 percent below the record set in April 2011, data compiled by Bloomberg show.
While the metal is trading 31 percent below the record $49.79 set in April 2011, this year’s average of $30.67 is the second-highest ever.
That will boost profit for Coeur d’Alene Mines Corp., which gets about 65 percent of its revenue from silver. Net income will jump 39 percent to a record $129.7 million this year, according to the mean of five analyst estimates compiled by Bloomberg. Shares (CDE) of the Coeur d’Alene, Idaho-based company rose 19 percent this year and will climb 6.3 percent to $30.59 in 12 months, according to the average of seven forecasts.
Pan American Silver Corp. (PAAS), based in Vancouver, will report profit of $264.6 million next year, from $212.2 million, the mean of five estimates shows. Shares of the company fell 0.5 percent in New York trading since the start of January and will rise 7.3 percent to $23.31 in the next 12 months, according to the average of 14 forecasts.
“In this accommodative monetary policy scenario, silver seems to be trading as an alternative currency,” said Michael Cuggino, who manages about $17 billion at San Francisco-based Pacific Heights Asset Management. “If the global economy picks up, silver will show some strength from industrial demand.”
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