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Silver Faithful Taking $5 Billion Hit in Crossfire: Commodities

Photographer: Susana Gonzalez/Bloomberg

This year’s plunge in silver exceeds the 18 percent drop in gold, which is poised for its first annual decline since 2000. Close

This year’s plunge in silver exceeds the 18 percent drop in gold, which is poised for... Read More

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Photographer: Susana Gonzalez/Bloomberg

This year’s plunge in silver exceeds the 18 percent drop in gold, which is poised for its first annual decline since 2000.

Silver is punishing investors amid diminishing trust in precious metals as a store of wealth and concern that growth is weakening, with $5.2 billion erased from the value of their near-record holdings this year.

Investors expected silver to be one of the biggest gainers in 2013, with a 33 percent return, a Bloomberg survey in December showed. Instead it’s leading a retreat in commodities with a 28 percent plunge to $21.79 an ounce, on track for its worst performance since 1984. While the median prediction from 14 estimates compiled last week is for a rally to $23.50 by Dec. 31, that would still mean a 23 percent drop for the year.

Analysts expected silver to surge because either turmoil would boost demand for precious metals as protection against inflation and currency debasement or accelerating growth would spur more industrial buying for everything from solar panels to batteries. The collapse of gold into a bear market, steady consumer prices and mounting concern about the strength of economies means silver’s allure is instead diminishing.

“Silver has been caught in the crossfire between being a precious and industrial metal,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “Since investors were selling gold, silver also lost luster. We need enough economic growth to happen before people can start considering it as an industrial metal.”

Gold Slump

This year’s plunge in silver exceeds the 17 percent drop in gold, which is poised for its first annual decline since 2000. The Standard & Poor’s GSCI gauge of 24 commodities fell 3.9 percent, extending its retreat from last year’s peak to 14 percent. The MSCI All-Country World Index of equities advanced 6.1 percent since the start of January and a Bank of America Corp. index shows Treasuries lost 1.6 percent.

Investors are maintaining their belief in silver even as they lose faith in gold. While the amount of silver held through exchange-traded products is little changed this year, and within 5 percent of the record reached in March, gold holdings dropped 19 percent, data compiled by Bloomberg show.

Silver investments stand at 18,918 metric tons, valued at $13.3 billion and enough to meet global demand for jewelry and silverware for almost three years. The value of gold ETP investments slumped 33 percent to $94.6 billion this year.

Investors for now are treating silver more like a precious metal than an industrial one, with its 30-week correlation coefficient to gold at 0.85, from 0.68 in 2011. A figure of 1 means the two move in lockstep. Silver also tumbled into a bear market in April and is now 56 percent below the record $49.8044 reached in April 2011.

Coin Sales

The slump spurred demand for physical metal, with the U.S. Mint predicting last week that its gold and silver coin sales may reach a record in 2013. The Austrian Mint sold about 2 million ounces of silver in April, compared with 8.8 million for all of 2012. Degussa Goldhandel GmbH, a precious-metal trading and investment company in Frankfurt, said silver sales last month were double the first-quarter average.

Hedge funds and other large speculators have turned bullish again after betting on lower prices as recently as mid-May, U.S. Commodity Futures Trading Commission data show. They are holding a net-long position of 1,230 futures and options, compared with a five-year average of 21,400 contracts.

Industrial demand may gain as the global economy improves, with the International Monetary Fund predicting growth of 3.3 percent this year and 4 percent in 2014, from 3.2 percent in 2012. About 50 percent of silver is used in industry, compared with 10 percent for gold, data from the Silver Institute and London-based World Gold Council show.

Mobile Phone

Consumption by industrial users will rise 1.7 percent to a three-year high of 14,625 tons this year and gain another 2.8 percent in 2014, Barclays Plc predicts. A car contains as much as 30 grams (1.1 ounces) and a mobile phone as much as 0.25 gram, according to Washington-based Silver Institute data.

Slowing investor demand means industry will have to absorb a bigger share of this year’s supply glut, which Barclays says will expand 8.9 percent to 5,512 tons. The cumulative surplus since 2009 will have reached 20,759 tons by the end of 2013, or almost 10 months of mine output, the bank predicts. Inventories monitored by Comex in New York rose 11 percent since the start of January, touching a 15-year high of 5,204.1 tons in April.

China, the biggest buyer after the U.S., imported the smallest amount of metal since at least 2008 in April, customs data show. The nation more than doubled mine output since 2000, according to CPM Group Inc., a New York-based research company.

Policy Makers

Signs the U.S. economy is strengthening boosted speculation the Federal Reserve will curb stimulus that helped silver jump 91 percent since 2008. Fed Chairman Ben S. Bernanke said in May that the pace of the $85 billion in monthly bond buying could be reduced if the jobless rate keeps dropping. Policy makers will trim purchases to $65 billion in October, the median of 59 economist estimates compiled by Bloomberg this month shows.

“As the Fed continues to talk down the market and trim down quantitative easing, it will hurt precious metals,” said Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City. “Now that the Fed is talking about slowing it, it makes the market nervous. Unless you see a sustained rise in gold you will not see any improvement in silver prices.”

Gold may drop to $1,100 an ounce in a year, from $1,382.98 now, Credit Suisse Group AG forecast last month. Goldman Sachs Group Inc. sees gold at $1,345 in 12 months.

Price Swings

The slump in silver, mostly a byproduct in the mining of other metals, is crimping profit for mining companies. Shares of Mexico City-based Fresnillo Plc (FRES), the largest primary silver producer, dropped 41 percent in London this year. Coeur Mining Inc. (CDE), which gets about 61 percent of its revenue from the metal, slid 43 percent in New York trading.

Holdings of silver in ETPs rose 1.1 tons this year, compared with a 1,621-ton expansion in 2012, data compiled by Bloomberg show. Further gains may be curbed as silver’s widening price swings dissuade investors. The metal’s 60-day historical volatility reached an 11-month high in April as it entered a bear market, the 11th in nine years, and climbed further since. It is now at 37 percent, compared with 29 percent for gold.

“Investor sentiment will remain poor going forward, as with gold, and the real risk will come from further ETP liquidation,” said Jeremy Baker, a senior commodities strategist overseeing about $800 million at Harcourt Investment Consulting AG in Zurich. “You have some decent areas of industrial demand, but you need to see significant uptick in those areas to really see any kind of flow through, and you’re just not seeing that at the moment.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net

To contact the editors responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at sstroth@bloomberg.net

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