Silver at mercy of opposing trends
Silver, known for being a market of extremes, is living up to its reputation in 2017.
Prices rallied 17% in the first four months, only to reverse and wipe out those gains. Despite the sell-off, investors are pouring money into exchange-traded funds (ETFs) and assets have reached a record 21,211 tonnes, valuing the holdings at $11bn.
The picture is bearish in the futures market, where hedge funds now hold the first net short position in two years.
Different sorts of investors are driving the opposing trends, said George Coles, an analyst at research firm Metals Focus.
Large, active hedge funds shorted Comex futures due to the risk of higher US interest rates, driving silver prices lower, he said. ETF buyers tended to be smaller traders who used silver for long-term diversification of their portfolios. They would be rewarded for their bullishness as slower US economic growth spurred demand for haven assets, Coles said.
He predicted that silver prices had probably bottomed and would rebound. Prices would reach $20.25 an ounce in the next 12 months, from $16.164 at present.
US economic growth would not be as robust as predicted and that would probably lead to a slower-than-expected increase in interest rates, which would benefit precious metals.
PRECIOUS METALS TEND TO DO WELL IN LOW-RATE ENVIRONMENTS AS THEY DO NOT PAY INTEREST
The testimony of Federal Reserve chairwoman Janet Yellen to Congress last week dimmed hopes for another rate hike in 2017. Precious metals tend to perform well in environments of low rates as they do not pay interest.
Silver prices have suffered since April as investors bet that central banks are preparing to tighten monetary policy. Silver is down 12% in the past three months, the biggest drop among metals in the Bloomberg commodity index. Gold declined 4%.
The recent losses were overdone, said David Govett, head of precious metals trading at Marex Spectron Group in London, adding that he would “be a buyer on dips”.
There is much speculation that silver is due for a recovery. Assets in ETFs backed by silver have risen 6.6% since April 24. In the same time, hedge funds turned negative as prices tumbled. In the week ended July 11, hedge funds were net short by 5,402 contracts. Short positions have tripled since the week of April 25 to 60,775 contracts.
Silver tended to outperform gold during a rush in haven demand, making the metal more attractive for investors looking to hedge against surprise events, said John Butler, head of wealth services for Toronto-based GoldMoney. “Silver is a coiled spring ready to bounce,” he said. “The Fed is getting ready to blink on rates.”