Silver Rides a Roller Coaster

May 21, 2013 at 08:57

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Silver earned its moniker as the “Devil’s metal” with a day of whipsaw trading that took prices to their lowest level since September 2010.

Silver prices began the day with a 9.4% drop in the first 10 minutes of trading, a move so big it forced exchange operator CME Group Inc. to halt trading four times. The metal shot higher almost as quickly about 18 hours later, and at one point was up nearly 4% on the day.

It ended between those two extremes, with front-month silver for May delivery gaining 22.9 cents, or 1%, to settle at $22.5680 a troy ounce.

Monday’s roller-coaster ride highlights the particular risks of holding silver, which in the past weeks has been overshadowed by the decline in gold. Both precious metals move largely in tandem, but, historically, silver has been prone to wider price swings because it is lightly traded compared with gold.

Traders attributed silver’s opening decline to large sell orders by investors who needed to raise cash to cover losing bets on the yen, which had risen earlier in the day.

Now, money managers are pointing to factors that are likely to hasten the fall in silver prices. Industrial demand is contracting at the same time that demand from investors is waning. And even with prices down 25% this year, miners have little incentive to ratchet back output, analysts said. That is why investors are even more bearish on silver than gold.

“The reasons investors have wanted to hold silver over the past few years have been taken out one by one,” said Ananthan Thangavel, managing director of Lakshmi Capital, a commodity trading adviser in Beverly Hills, Calif.

But as silver continues to decline, the market is becoming more prone to swings, with the triggers often unclear, traders said. “Any time volatility picks up like this, you know that trading is being dominated by short-term traders. You kind of want to get out of the way,” Mr. Thangavel said. He is betting on silver prices to fall further.

He isn’t the only one. Hedge funds and other large money managers tracked by the Commodity Futures Trading Commission have cut their net wagers on higher silver prices by 94% this year, compared with a 63% drop for gold.

Investors have sold gold, silver and other precious metals in favor of greater returns in the stock market, which has breached records. The Standard & Poor’s 500-stock index has gained 17% this year. Others have moved away from commodities amid speculation that the Federal Reserve will taper its bond-buying programs later this year, easing fears of higher inflation.

Gold prices are down 17% this year, though the decline has generally been more orderly than silver’s. On Monday, front-month gold gained $19.40, or 1.4% to $1,384.30 a troy ounce.

“The continued move lower [in silver] has been remarkable,” said John Kilduff, founding partner at New York hedge fund Again Capital. Mr. Kilduff said his fund has been betting on lower silver prices in recent weeks, and he expects the metal to fall to $16 an ounce.

To be sure, silver’s decline has attracted bargain hunters, leading prices to unexpectedly leap higher when they pile into the market, as they did Monday afternoon. Bulls see $20 an ounce as a level that prices will have difficultly falling below. Physical buying is also up. The U.S. Mint has been overwhelmed by demand for silver coins, running out of inventory earlier this year.

“For investors who don’t have positions in these assets, these are attractive price levels” to buy, said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds, with about $14 billion under management, who holds both silver and gold in his portfolio.

Prices have declined amid signs of slowing global manufacturing activity. This segment contracted 4.5% in 2012, metals consultant Thomson Reuters GFMS said in a report last month. About half of all demand for silver comes from industrial users like car makers and electronics manufacturers, according to GFMS.

Mining companies are unlikely to throttle back output even after prices slumped. The average cost to dig up metal from silver mines stood at less than $9 an ounce last year, GFMS said