Precious metals bounced off the previous day’s lows in early Asian trade Friday, as investors saw opportunities to buy back in at lower levels and judged that the economic fears that have underpinned the metals’ rise in recent months have yet to abate.
At 0215 GMT, spot gold was up nearly 1% from its late New York level, rising $14.20 to $1,487.30 a troy ounce. Silver, whose 27% fall since last week has been the most severe since at least the mid-1990s, added 84 cents to $35.50/oz.
The sharp move down in the metals over the past week has capped an extraordinary run which saw spot gold rise to an all-time record of $1,576.52/oz early on Monday while silver peaked at $49.831/oz the previous Monday, a 31-year high only outstripped during the Hunt brothers’ notorious attempt to corner the global silver market in the late 1970s and early 1980s.
Even more bullish market participants said that a return to those levels is unlikely in the short term. Nigel Phelan, Asia director of ETF Securities, a company running exchange-traded funds in all four major precious metals, said he would be surprised to see silver climb back to $40/oz in the immediate term.
“The price was pretty much overdone,” he said. “The thing people need to realise is that the precious metals space is volatile. We’re going to see these peaks and troughs.”
The company’s silver ETF had not seen particularly large outflows over the past week, he said, something he put down to the preponderance of large fund managers and institutions among the fund’s investors.
“These people will tell you that the run silver’s had doesn’t make any sense to them. The larger (quantitative funds) we deal with would have been in silver a long, long time ago and those who’ve got in since have been speculators and retail investors, people who are not so switched on,” he said.
Several large players – including George Soros’ eponymous fund and the Passport Capital and Pennant Capital hedge funds – have been reported as quitting their silver and gold positions as prices have slid over the past week. The iShares Silver Trust (SLV), the world’s largest silver exchange-traded fund, has reduced its holdings of silver by 9.9% since the metal’s peak last Monday, to 10,268.92 metric tons from 11,390.06 tons.
A trader in Sydney said that the large moves out of ETFs helped explain the relatively modest drop in open interest of Comex silver futures. Open interest, representing the number of current futures contracts on the exchange, have fallen just 3.9% from 135,844 to 130,525 over the course of the week, still at their lowest levels since early February.
“Any hedging done day to day by market makers is going on through ETF buying and selling and will filter out in the spot market these days,” he said. “Six or seven years ago you’d have seen a huge fall in the futures but nowadays there’s probably an underlying level of open interest that’s going to stay there. People haven’t been trading on the spot market so much because of the credit restrictions.”
The metals are still well ahead of historic levels, and any trader who bought silver before the end of February is still likely to be in the money at this stage. However, the trader said buying had reached levels at which a drop was inevitable.
“Given the run that silver’s had there was definitely a layer of hot money and speculative money. The market was over bought,” he said.