Silver ETF Holdings Sink Most in 12 Months

June 26, 2013 at 09:27

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Holdings of the world’s largest silver-backed exchange-traded funds have fallen their most in a year to levels last seen in December, sparking fears that mom-and-pop investors have started to unwind investments after last week’s rout.

The world’s largest silver ETF, the iShares Silver Trust , on Monday posted a 192-tonne, or nearly 2 percent, decline to 9,882 tonnes, its biggest daily drop since June last year. Similarly, holdings in six major silver ETFs tracked by Reuters fell to 16,139 tonnes, their lowest since December.

After a sharp outflow in mid-May, the latest ETF redemption in silver suggests some longer-term investors might have lost confidence and are worried it could mark the beginning of prolonged liquidation similar to those seen in gold investment funds.

Silver has long been a favorite for smaller retail investors and speculators who want to gain exposure to gold at a fraction of the price. They also tend to buy and hold and change hands less frequently.

Monday’s drop was preceded by a 1 percent jump in holdings as some investors tried to bottom-pick after spot silver plummeted 8 percent on Thursday to multi-year lows after the Federal Reserve outlined plans to wind down the era of easy money if the U.S. economy continues to recover.

However, traders are worried that the latest outflow could spell more troubles for the metal since holdings at silver ETFs had so far this year been sticky and fared far better than their gold counterparts, traders said.

“Silver ETFs have been showing surprising resilience, but I think both markets are going to see outflows over the next several weeks if not months as prices continue to grind lower,” said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.

Silver ETFs have been more resilient to the investor exodus that has hit gold products since February, as more retail investors are attracted to silver’s low price and tend to hold onto it in hopes of a sharp rally.

Despite silver’s 35 percent price drop so far this year, silver ETF holdings slipped just 1 percent during the same period, Reuters data shows.

Year to date, gold ETFs have lost around a fifth of their holdings as funds and institutional investors dumped the traditional inflation hedge, sending bullion prices 24 percent lower.

“There are not as many hedge funds and momentum investors in silver compared to gold. That’s why there is a bit more consistency in the underlying ETF holdings,” said Jeffrey Sica, chief investment officer in Sica Wealth which manages over $1 billion in client assets.

In tonnage terms, silver ETFs are also far more popular than bullion. Holdings in eight of the major gold ETFs were just under 60 million ounces on Monday, their lowest since February 2011 and just over one-tenth that of the six main silver products.

Even so mom-and-pop investors continue to pile into the physical market, buying up silver bullion coins after the historic sell-off in mid-April triggered a surge in pent-up demand.

They prefer the physical asset rather than shares in a fund because they believe coins and bars offer the ultimate insurance policy in the event of extreme economic and political turmoil.

In the case of silver, however, the much lower unit price of silver ETFs over gold has made the investment product particularly popular, especially when premiums of silver bullion coins remain high due to strong demand, traders said.