MAC: Mines and Communities

Silver, an Epic Rise and Fall

Published by MAC on 2011-05-17
Source: Bloomberg, Wall Street Journal, AP, BBC (2011-05-13)

After prices hit a three-decade high in early May, silver has suffered its worst one-week drubbing since 1980, when an infamous alleged attempt by Texas's Hunt brothers to corner the silver market came undone.

The post May-Day tumble sent silver-futures prices down to $35.28 an ounce from nearly $50 in just five trading days (they dropped a dizzying 12% in just 11 minutes after the Wall Street Journal reported that George Soros was dumping silver, which triggered more selling). The silver panic spilled over into gold and copper as well, though to a much smaller degree.

** Updated on 17th May 2011

Silver, Gold Futures Dropping as Soros Reported to Have Sold

By Chanyaporn Chanjaroen

Bloomberg

4 May 2011

Silver futures fell, heading for the biggest three-day drop since 2008, and gold also retreated amid a report Soros Fund Management LLC sold precious-metal assets.

Soros Fund Management sold some holdings because of a reduced risk of deflation, according to the Wall Street Journal, which cited unidentified people close to the matter. Michael Vachon, a spokesman for Soros, declined to comment. The fund held shares in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, and the iShares Gold Trust (IAU) at the end of 2010, U.S. Securities and Exchange Commission filings show.

Silver futures fell as much as 5 percent to $40.465 an ounce on the Comex exchange in New York. The contract was at $41.72 as of 6 a.m. local time, for a three-day decline of 14 percent. Margin requirements were raised 38 percent in since April 26. Gold futures retreated 0.2 percent to $1,537 an ounce.

"Some small, speculative players had to trim their silver positions as they couldn't afford to pay for such margins," said Jerome Berset, a portfolio manager at Palaedino Asset Management SA in Geneva, which has 1 billion euros ($1.49 billion) in assets and has maintained holdings in gold and silver. "For long-term players with fundamental views, this may be a good time to get in for both silver and gold."

The decade-long bull market in gold and silver attracted fund managers from Soros to John Paulson and spurred central banks to add to their reserves for the first time in a generation. Investors in exchange-traded products backed by gold accumulated more metal than all but four central banks, while silver holdings are equal to more than eight months of global mine supply, according to data compiled by Bloomberg.

Gold Reaches Record

Gold reached a record $1,577.57 an ounce on May 2, a sixfold gain since prices bottomed in August 1999. Spot silver rose to an all-time high of $49.79 an ounce on April 25, a 12- fold advance from the low of $4.04 reached in 2001.

The Soros fund held 4.72 million SPDR Gold Trust shares as of Dec. 31, equal to about 460,000 ounces, an SEC filing on Feb. 14 showed. It also owned 5 million shares in the iShares Gold Trust, equal to about 48,800 ounces. The firm had 19,900 shares in Pan American Silver Corp., a Vancouver-based company mining the metal in Mexico, Peru, Argentina and Bolivia. There were also stakes in Barrick Gold Corp. (ABX), Kinross Gold Corp. (K) and Novagold Resources Inc. (NG), the filing shows.

Soros described gold at the World Economic Forum's meeting in Davos, Switzerland, in January last year as "the ultimate asset bubble." In a Nov. 15 speech in Toronto the 80-year-old said conditions for the metal to keep rising were "pretty ideal" and at this year's Davos forum he said the boom in commodities may last "a couple of years" longer.

Paulson Holding

Paulson & Co.'s holding was 31.5 million shares in SPDR Gold at the end of December, an SEC filing shows.

Passport Capital Management LLC also sold some gold holdings to lock in profit, the Wall Street Journal reported, citing a person close to the fund. Passport Capital held 3 million put options on SPDR Gold shares (GLD) and 28,100 shares in Barrick Gold as of Dec. 31, according an SEC filing. Two phone calls outside of normal office hours to John Burbank, founder of Passport Capital, weren't answered.

CME Group Ltd., the owner of the Comex exchange, said this week the minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will rise to $16,200 per contract at the close of business yesterday from $14,513. A year ago, the margin was $4,250.

"Silver is often the lead indicator for changes in trends, or at least for corrections," David Wilson, an analyst at Societe Generale SA, wrote in a note. After futures rallied to a record $50.35 an ounce in January 1980, prices dropped 78 percent in four months.

From the start of this year to the end of April, silver futures rallied 57 percent and were the best performer among the 24 raw materials tracked by the Standard & Poor's GSCI Index.

Silver assets held in exchange traded products fell 1.1 percent to 15,169.80 metric tons yesterday, while gold holdings stood little changed at 2,069.78 tons, according to data compiled by Bloomberg.


Silver-Mad Small Investors Fueled an Epic Rise and Fall

By Gregory Zuckerman and Carolyn Cui

Wall Street Journal

7 May 2011

When silver prices hit a three-decade high last week, David Zornetsky decided to do some buying. Searching for a job, the 31-year old in Beacon, N.Y., hoped to use gains from silver to finance a move to New York City and to pay down student loans. "I had been hearing that silver could go up to $150 an ounce this year," says Mr. Zornetsky.

Instead, silver has suffered its worst one-week drubbing since 1980, when an infamous alleged attempt by Texas's Hunt brothers to corner the silver market came undone. This week's brutal tumble sent silver-futures prices down to $35.28 an ounce from nearly $50 in just five trading days, and has left Wall Street pros and individual investors dazed, some dealing with sudden losses.

"I don't understand," says Mr. Zornetsky, whose silver investment fell about 25%. "Silver is supposed to do very well this year."

Behind silver's historic collapse is a market that came loose of its moorings, fueled by speculative traders, many of them small investors who may have jumped in at just the wrong moment.

"If gold is a Monte Carlo casino, silver is a slot machine in Las Vegas," says Andy Smith, a senior metals strategist at Bache Commodities.

Even the most sophisticated investors are divided about precious metals. For many of Wall Street's most-respected names, such as hedge-fund manager John Paulson, silver and gold represent protection from central banks that continue to spray money into the world's financial system, threatening to push inflation higher. But others, like George Soros, view those fears as overstated, arguing that the Federal Reserve is unlikely to let inflation get out of hand. Mr. Soros's funds have sold silver and gold positions in recent weeks.

All kinds of commodities have run up this year, but few markets surged liked silver. That's because silver is different than most others, making it more susceptible to quick peaks, as well as plunges.

For one thing, silver is smaller than many other markets, which means it scares off some larger investors who might otherwise step in to temper big moves. Gold has nearly four times the amount of tradeable futures contracts as silver. The value of new gold supply last year was $217 billion, with 17% of the total supply held by the world's central banks and multinational financial institutions. By comparison, the new supply of silver amounted to $49 billion in 2010, according to GFMS Ltd., a London-based metals consultancy. And less than 5% of silver is held by central banks and institutions, analysts estimate.

A big chunk of the world's silver is instead held by individuals in the form of coins, medals and bars, though it's hard to get accurate estimates of this figure.

Such investors are attracted to the relatively low price of silver, but they can also be prone to panic. Long-time fans of precious metals often are mavericks who can be suspicious of mainstream securities firms, wary of financial catastrophe and reluctant to keep their money in the bank. They often rely on the advice of newsletter writers, obscure websites and coin-shop proprietors or their own research.

Once considered a haven for those with bleak economic outlooks or dystopian views of society, gold and silver began to rise early in the last decade, as investors searched for ways to protect against the falling dollar.

Silver tumbled to $9 an ounce during the financial crisis of 2008, as investors dumped all kinds of holdings, but buying resumed in early 2009. The bull market accelerated last August, when the Federal Reserve and other central banks announced aggressive measures to buy bonds and pump money into the global financial system, steps that raised concerns about the value of the dollar and other leading currencies.

Silver buying moved into high gear over the past eight months, suggesting that prices had begun to reflect a speculative frenzy, rather than currency or inflationary fears. Silver climbed 165% between late August and last week, well above the 26% rise in gold.

In recent months, trading volume of silver-futures contracts, which allow investors to purchase or sell a certain amount of silver, soared.

So far this year, those contracts' daily volume has more than doubled compared with the same period last year, another sign of the rabid interest in silver.

Day traders, or individuals who quickly buy and sell stocks, began to focus on silver, much as they did with Internet stocks in the late 1990s. A majority of the 350 individual traders hosted by T3 Trading Group in New York began buying and selling silver, rather than stocks.

"It's been 1999 all over again," says Evan Lazarus, a 35-year old trader who manages T3 Trading. In April, Mr. Lazarus shifted his own trading to leveraged exchange-traded funds, or those that rise or fall in price twice or three times the move of silver. "Silver is the new stock market."

Many individuals piled into such funds. Over a three-week period last month, assets at a half-dozen silver ETFs soared about $4 billion, or more than 20%.

Newsletter writers helped fuel the market's surge. "It is obvious to anyone with any ability to think, that precious metals are a must investment!" said longtime silver backer David Morgan, whose newsletter has 1,000 subscribers and thousands more who read email alerts. The note came after Standard & Poor's warned of a possible downgrade of the U.S.'s credit rating. "Where else can anyone invest for capital preservation outside of precious metals?"

By last week, the price of 32 ounces of silver equaled one ounce of gold. In contrast, over the past three decades, it took an average of 63 ounces of silver to buy an ounce of gold. The last time silver was as pricey relative to gold was in 1983.

When Chairman Ben Bernanke reaffirmed the Fed's low-interest rate policies on April 27, silver soared close to $50 an ounce, a 31-year nominal high.

That week, a team of risk-management specialists at the CME Group, which operates the Comex, the biggest silver trading exchange, picked up on a sudden spike in volatility, according to Kim Taylor, a CME executive. The team decided to hike margin requirements, forcing traders to come up with more cash or other collateral to ensure there was sufficient capital in their accounts to cover losses if the volatility continued.

On Tuesday and Thursday of this week, CME raised requirements again. Those moves increased trading costs by about 80% and a number of investors cashed out.

"What all members need to think about now is protecting your gains," Mr. Morgan urged his newsletter readers. "REDUCE YOUR RISK."

Lou Forte found himself both a winner and loser in silver's wild ride. On Monday morning, when the dollar briefly strengthened on news of Osama Bin Laden's death and silver showed immediate weakness, Mr. Forte, a 35-year-old day trader from Westchester County, N.Y., bought a silver ETF. It soon rallied. He sold at a profit. Next, he correctly bet prices would fall. On a roll, he tried to call the bottom again, buying early on Thursday. But this time silver kept plunging and he suffered losses.

"I traded through the Internet bubble and traded through a lot of crazy days, and this has been one of the most gut-wrenching times in my 13 years of doing this," said Mr. Forte. "The volatility is enough to make you vomit."

Silver ETFs, favored by many individuals, have suffered among the most pain, and there are signs investors are getting out. More than 36 million ounces of silver has been dumped into the market between April 26 through this past Thursday, more silver than all the American Eagle silver coins that investors bought from the U.S. Mint last year.

After this week's bloodbath, "some of these people probably would never touch silver again," says Mr. Smith of Bache Commodities.

Though silver is a playground of smaller investors, it has also attracted growing interest by hedge funds and other pros. They've formed two sides of an intellectual debate, pitting those who fear severe economic disruption against those who think the Federal Reserve can steer the economy to calmer territory.

Mr. Soros's fund, now run by Keith Anderson, spent the last two years accumulating silver and gold holdings in the expectation that deflation, or a sustained fall in prices, would boost interest on precious metals by skittish investors. Their holdings in that case would soar.

But Mr. Soros's firm recently exited its gold and silver positions, according to people close to the matter, because the firm is convinced the Fed's aggressive actions have eliminated the possibility of deflation. They have faith the Fed will succeed in keeping a lid on inflation by signaling its intention to raise interest rates, perhaps over the next six months.

Others dumping precious metals lately doubt the Fed will take much more aggressive action to help the economy, at least for now. That could potentially reduce appetite for a range of investments, including silver.

John Burbank, who runs hedge fund Passport Capital in San Francisco, became a fan of precious metals in 2002. Earlier this year, however, he sold his entire $150 million stash of gold, convinced the Fed won't extend its so-called quantitative easing measures beyond June.

"Silver prices have been parabolic, but the time to buy again will be months away," he says.

Bulls on precious metals, like John Paulson, who has focused his buying on gold, say the Fed won't be able to rein in inflation once it begins in earnest. Silver is more attractive than gold, some of these investors say, partly because its inflation-adjusted all-time high is about $140 an ounce, about four times where it trades today. Gold, which traded Friday at $1491.20 an ounce, is actually closer to its adjusted all-time high.

Silver remains up 14% in 2011, one of the best investments, despite the recent plunge. Indeed, some hedge funds, such as Kyle Bass's Hayman Capital, bought silver early Friday, sensing the white metal had reached bargain levels and was due for a bounce, says a person close to the trader.

Some smaller investors are holding on, too. Donna Badach, a 55-year-old retiree, started buying silver in 2003 at an average cost of $25 an ounce. She now has a cache of silver coins and bullion, which she says are stored in a "private depositary" and account for 60% of her net worth. She buys silver "for insurance purpose," because "it's so shaky to see what's going on all over the world."

"I don't believe the correction will last long. Silver will hit $100 before the end of this year," says Ms. Badach, who had worked in the mortgage-banking industry in Hillsboro, Fla. "I have never felt so sure in my life about something."

-Tom Lauricella contributed to this article.


How to Surf the Silver Plunge

By James B. Stewart

The Canadian Press/Associated Press

7 May 2011

After more than doubling in the past year and hitting a 31-year high last Friday, silver prices plunged nearly 30% this week, falling to $35 a troy ounce. They dropped a dizzying 12% in just 11 minutes after Asian markets opened Sunday evening Eastern U.S. time. Then The Wall Street Journal reported that prominent hedge-fund investors like George Soros were dumping silver, which triggered more selling.

The silver panic spilled over into gold and copper as well, though to a much smaller degree. Yet precious metals, even silver, are still showing healthy gains for the year. In my view, the recent turmoil suggests it is time to take some profits, or at least reduce precious metals and commodity allocations to prudent levels.

I don't own any gold or silver per se, and have never recommended speculating in precious metals. But I do own and have recommended a variety of inflation hedges, including broad commodity funds and exchange-traded finds as well as shares of Australia's BHP Billiton, the world's largest diversified commodity producer. As I have pointed out before, some country-specific ETFs, such as Brazil and Russia, are really commodity plays. None of these funds have been anywhere near as volatile as silver or the iShares Silver Trust ETF, but their values have swollen beyond my targeted allocations.

BHP has buoyed my portfolio over the past three years, surging from $32 a share in 2009 to a peak of $101 last month. I have never sold a share, and in the process it has become my second-largest holding (after Google). Despite the recent commodities selloff, its shares have dropped just $8, to $96. The Brazil ETF I own-iShares MSCI Brazil Index-has 35% of its holdings in just two companies: oil producer Petrobras and commodity giant Vale. Since peaking at nearly $82 a share in November, the ETF's shares have dropped over 10% to $73. Even so, shares have more than doubled since their 2009 low. I believe it is time to prune both positions.

This doesn't mean I know the commodity market has peaked. After all, hedge-fund investor John Paulson, now legendary for shorting the subprime-mortgage market and for betting on gold, remains a big gold bull. I'm even less inclined to predict the future direction of commodity prices than I am the direction of the stock market. What I do know is that these assets have had huge run-ups, at rates that simply can't be sustained over long periods of time.

I still maintain that all investors should own hedges against the possibility of future inflation, and commodities and stocks of commodity producers provide such protection. But in my view they shouldn't exceed 10% to 20% of a portfolio for most investors-and now is the time to rebalance.


Silver dives again as commodities drubbing continues

BBC

13 May 2011

The price of silver - one of the most volatile commodities of late - has dropped another 17% in 24 hours.

The precious metal is down 35% since setting an all-time high two weeks ago.

Oil prices also fell, with US light, sweet crude down another 4.5%, before bouncing, after a 5% fall on Wednesday.

Traders say market volatility has been driven by concern at the weakness of the US and European recoveries, as well as the unwinding of heavy bets on price rises by market speculators.

"Everyone's wondering if the commodity bubble has burst," said a broker based in London.

Silver - which is predominantly used as an industrial metal - had been at the forefront of the commodities rally over the last year, with many speculators coming to value it as a cheaper alternative to gold.

But the direction of speculative money has now sharply reversed.

"Investor interest in silver has declined dramatically since the start of the correction, epitomised by the large outflows [from exchange-traded funds]," according to Anne-Laure Tremblay, an analyst at the French investment bank BNP Paribas.

Meanwhile, prices of other raw materials have also fallen across markets, notably those of industrial metals such as lead, copper, aluminium and tin, all of which were down another 2-3% by mid-afternoon trading in Europe on Thursday.

However, it is the price of oil that has attracted most political attention, with many keen to blame speculators for the previous rally.

The head of Exxon, Rex Tillerson, told the Senate finance committee on Thursday that the oil price should only be about $60-$70 based on the actual cost of production, implying that the difference was largely down to market speculators.

A group of 17 senators in Washington have been calling for new regulations to limit traders' ability to bet on rising oil prices.


Soros dumps gold in Q1; Paulson still holding

Frank Tang and Aaron Pressman

Reuters

17 May 2011

NEW YORK/BOSTON - Billionaire financier George Soros, who called gold "the ultimate bubble," dumped almost his entire $800 million stake in bullion in the first quarter, well before a commodities slump blamed partly on reports he was liquidating his holdings.

Famed gold bull John Paulson held his ground, but Soros was joined in the retreat by several other big names, including Eric Mindich and Paul Touradji, according to 13-F filings with the U.S. Securities and Exchange Commission that provide the best insight into where hedge funds are placing their bets.

Gold prices barely reacted to the news, with spot gold up 0.3 percent at $1,494.29 an ounce by 0327 GMT. Rising inflation worries and a debt crisis in the euro zone should help prevent any sell-off in the precious metal, analysts said.

Soros, who has been bullish on gold in the past several years, cut his holdings in the SPDR Gold Trust to just $6.9 million by the end of first quarter, compared with $655 million in December, becoming the most high-profile investors to turn his back on one of the market's best-performing assets.

He also liquidated a 5 million share stake in the iShares Gold Trust , the filings showed. His total holdings in gold-backed ETFs was $774 million as of December.

Gold rose for a tenth consecutive quarter in the three months to March, hitting record highs above $1,400 an ounce, buoyed by political turmoil in the Middle East and North Africa and lingering worries about indebted European countries.

The gains accelerated in April, but peaked at the start of this month, reaching a record $1,575 an ounce on May 2.

Prices have since fallen more than 5 percent amid the biggest commodities slump since late 2008, a move partly triggered by a Wall Street Journal report that Soros' $28 billion fund was selling precious metals -- and fuelling fears other big funds were also seeing a peak.

Eric Mindich, who runs Eton Park Capital Management, nearly halved his stake in the SPDR gold trust to $326 million for the first quarter, a filing showed on Monday.

Mindich's fund also owned $839 million worth of call options by the end of the first quarter, compared with $1.1 billion worth of put options at the end of the fourth quarter.

Touradji Capital Management, one of the world's largest commodities-oriented hedge funds run by Paul Touradji, sold 173,000 shares in the SPDR Gold Trust during the quarter. Those shares would be worth about $25 million at current prices.

But John Paulson, who notched up the industry's biggest ever payout last year, kept his 31.5 million shares, or $4.4 billion stake, in the SPDR fund, remaining the biggest shareholder of the world's largest gold-backed exchange traded fund for the quarter, according to regulatory filings.

Deflation Threat Recedes

The sales make sense given that Soros said he had bought gold because he was worried about deflation, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Pittsburgh.

"It's pretty hard to make the case for deflation right now so if that was a reason you were buying gold, you should take this signal from Soros," he said.

Inflation is now the greater concern, Luschini said. So most investors should still keep about 3 percent to 5 percent of their assets in gold to protect against inflation and possible further problems in the world financial system.

"It's not the most bullish news I've ever heard in gold, but it's not the end of the world either," said Citigroup analyst David Thurtell.

"With the euro zone sovereign debt problems still going on, inflation worries and the dollar weakness, gold's got good underpinnings at the moment. I think it will be well supported in the $1,450-$1,475 range. I don't see a widespread sell-off."

Still, many investors are likely to follow Soros' lead.

"Obviously hedge funds and speculators have scaled back their long positions. But they are still holding massive positions in metals, so I won't be surprised to see continuous liquidation in all commodities," said a Hong Kong-based trader.

Soros also slashed stakes in gold and silver mining companies during the first quarter. The firm owned 1.4 million shares of Kinross Gold at the end of the quarter, down from 4 million shares three months earlier. Holdings in Novagold Resources dropped to 3.5 million shares from 12.9 million.

Gold ended the first quarter little changed, as the spot gold prices were only $10 higher to end at $1,430 an ounce on March 31, and the SPDR Gold Trust was up 1.3 percent.

In the second quarter, gold hit a record high $1,575.79 an ounce on May 2 fueled by the outlook of low U.S. interest rates.

So far in the second quarter, SPDR Gold Trust's bullion holdings gained only about 1 percent to 1,229 tonnes by Friday, well below its record high of 1,320.436 tonnes set on June 29 last year.

Institutional investment managers are required to file form 13-F with the SEC within 45 days after the end of each quarter. (Additional reporting by Manolo Serapio Jr. and Rujun Shen in Singapore; Editing by Andre Grenon and Clarence Fernandez)


What caused the silver price spike - and crash?

By Rowena Mason, and Garry White

The Daily Telegraph

17 May 2011

No one could really give any comprehensive explanation for why the silver price climbed 175pc in a year.

The market was meant to be in surplus but somehow investors were in the midst of a buying frenzy that flew in the face of fundamentals.

Big banks such as JPMorgan were known to be shorting the market - and suffering - as the price just kept rising and rising.

There were rumours of billionaires with a taste for the precious metal cornering the market or a squeeze like Warren Buffett's ill-fated play on silver in the 1990s that pushed up the price 80pc before it crashed.

Other market analysts rubbished these as conspiracy theories, saying that perhaps people were underestimating the extent of demand from the Far East.

Yet there seemed to be no definitive answer to why the price would go soaring from $16.94 per ounce in August to almost $50 per ounce at its peak last month. By April, many were warning of a possible market crash.

The correction in the silver price over the past two weeks - with the price dropping by a third - can therefore hardly have come as a surprise.

It's unclear just what sparked the initial jitters about silver - potentially rumours about major selling from George Soros's hedge fund, but it soon spread like a virus across the whole commodities sector.

Compounded by negative economic data about world growth and concerns that demand for oil is being eroded by high prices, commodities began their two-week downward spiral, albeit with the odd upward hiccup.

Analysts from Commerzbank described silver's movement as a dramatic "rollercoaster ride".

And they say it might not be over yet. "We still see further correction potential for silver, though its downward course is unlikely to be a one-way street," said one.

So are we any closer to working out what was behind the original price spike and consequent crash?

Terry Hanlon, president of Dillon Gage, the precious metals trading firm, blames the unwinding of the long-silver, short-dollar hedge for the scale of the correction.

"Many commodities have climbed since last summer because of expectations that improving national economies will boost demand for materials. And with most commodities priced in dollars, the greenback's decline against other currencies since August made raw materials cheaper for foreign investors to buy.

"US investors bought silver and gold as a way to hedge against further erosion in the dollar's buying power."

However, it's difficult to untangle whether the dollar's rise has caused commodities to fall or if a commodity sell-off has boosted the dollar.

What's more, buying against the weak dollar could only partially explain the peculiar volatility of silver, the price of which was rising much faster than that of gold.

Daniel Major, of RBS, explains why the smaller, more sensitive silver market is more susceptible to speculation than gold.

"The price has been driven higher by investment and acute speculative activity, for two key reasons," he said. "The first is the use of the market by professional investors in order to maximise the benefits of a rising gold price. Silver has a history of volatility and is a thinner market than gold.

"Secondly the purchase of silver as an investment by private individuals who view silver as a cheap alternative to gold, notably in Asia."

It is these private investors, many of them apparently from China, who may be feeling burnt by the recent correction. The clue is in the volume of outflows from physically-backed silver exchange traded funds, which are often a mechanism for retail investment.

The world's largest silver ETF, iShares Silver Trust, saw its worst ever outflow of 32.6m ounces worth $1.2bn last week, with further large redemptions this week. Investors had added $700m during the year so far.

Exchange-traded funds allow retail investors to get involved in the market much more easily than trading paper futures.

The past fortnight's story of silver's rise and demise shows how risky a market for small players it can be.

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