Hedge Funds Burned by Silver Bets as Fed Signals Rates May Climb

  • Prices decline after Fed said it's still considering rate rise
  • More than $380 million wiped from silver ETPs in past week

Hedge funds picked the wrong time to build their bullish silver bets to a record.

Prices have dropped almost 4 percent since last Tuesday, when the funds’ wagers reached their peak. That’s the biggest such loss since July. A day after the speculators boosted their net-long positions in silver futures and options to the highest since 2006, the oldest government data available, Federal Reserve officials signaled U.S. interest rates could climb in December.

The threat of higher rates by year-end has sent ripples through precious metals, which lose out when monetary policy tightens because they don’t pay interest or dividends. Gold is trading near a one-month low, and platinum has fallen for four straight days. While those investing in gold were fortunate enough to pull back their bullish bets before the Fed statement, the silver bulls weren’t as lucky. Now, they’re looking for the exit, which could exacerbate price declines.

“Certainly, with the rate increase back on the table, the sentiment has again shifted in the precious-metals space,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “Silver will move down a lot more than gold, because we’ll have those speculative positions being taken off.”

Traders in Fed-fund futures are now pricing a 52 percent probability that the liftoff will come in December, up from 35 percent on Oct. 27, the day before policy makers issued their statement. More than $380 million has been wiped over the past week from the value of global exchange-traded products backed by silver, the most in almost four months. As of Oct. 27, money mangers held a net-long position in the metal of 51,585 contracts, data released from the Commodity Futures Trading Commission three days later show. That’s the highest since records begin in June 2006.

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