April 8, 2011 6:30 pm

Silver ETFs shine as price surges

Silver exchange traded fund holdings hit a record $20.2bn on Friday as the price of the precious metal raced beyond $40 an ounce for the first time since 1980.

Physically backed silver ETPs (funds and products) have gathered inflows of 366 tonnes so far this year, helping to swell total holdings to a record 15,554 tonnes.

In the early part of 2011, silver ETFs saw outflows but that was followed by a strong recovery, with inflows of 972 tonnes since early February.

The iShares silver trust, the largest silver ETF, has been one of the main beneficiaries with its holdings reaching a record 11,192.8 tonnes on Thursday.

The value of total silver ETP holdings has jumped by $5.2bn so far this year, helped by a powerfully rally for silver prices that has attracted retail investors in particular.

The silver price hit $40.28 an ounce on Friday, up 30.5 per cent so far this year, reaching its highest level since 1980 when the Hunt Brothers attempted to corner the market.

Silver has substantially outperformed gold in 2011 even though the price of gold has enjoyed a record breaking run, reaching $1,472.96 an ounce on Friday, up 3.8 per cent so far this year.

Both precious metals have found support from renewed weakness in the dollar, prompted by concerns about a possible partial shutdown of the US government due to budget problems and a stronger euro after the European Central Bank raised eurozone interest rates for the first time since 2008.

But analysts have warned that silver prices could be vulnerable to a sharp correction as an increasing supply surplus is expected in coming years.

Philip Klapwijk, executive chairman of GFMS, the precious metals consultancy, said silver would probably hit the $50 an ounce mark this year.

But Mr Klapwijk also warned: “There’s no convincing economic reason for why this is happening. It is still a market with a very large surplus.”

Suki Cooper, precious metals analyst at Barclays Capital, said she was concerned that interest in silver ETFs had become concentrated among retail investors.

Ms Cooper pointed to high levels of silver coins sales as evidence of the strength of retail investor interest in silver, while also noting that bets on further price gains by hedge funds (as shown by the net speculative long position on the Comex market) had risen only modestly this year.

Ms Cooper said there had been a “good recovery” in silver’s industrial demand but emphasised that total consumption had not yet recovered to its pre-crisis levels.

Pointing to the increases in silver supply expected from mine production, scrap and government sales, Ms Cooper warned that silver prices had become “detached from their fundamentals”.

Ole Hansen, a senior manager at Saxo Bank, said investment flows has been one of the main drivers for silver’s rally, and noted that a number of large hedge funds had “joined the party”.

Mr Hansen said this could potentially be a problem once the rally had run its course. “Silver continues to be a relatively small market and high beta (volatility) version of gold, which makes the journey north a fast and exhilarating ride. But one has also got to be aware that the rollercoaster contains big drops where speed normally picks up.”

Daniel Major, an analyst at the Royal Bank of Scotland said silver was “richly priced” when compared to its underlying supply and demand dynamics.

“The message is: do not chase silver at these levels,” said Mr Major.

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