Hedge funds bullish on silver as futures open interest nears record

Hedge funds are the most bullish on silver in seven months and investors’ holdings are expanding toward a record on speculation the metal will outperform gold as central banks seek to boost growth.

Wagers on rising prices jumped 10-fold since June, U.S. Commodity Futures Trading Commission data show. Investors bought 717.2 metric tons valued at $790 million through exchange-traded products this quarter, the most in a year, according to data compiled by Bloomberg. Prices will increase for at least the next three quarters and average $38 an ounce in the three months through June, or 11 percent more than now, based on the median of 14 analyst estimates compiled by Bloomberg.

If history is any guide, silver will beat gold after the Federal Reserve announced a third round of debt-buying and central banks from Europe to Japan pledged more action. Silver rose about 53 percent in the Fed’s first quantitative easing from December 2008 through March 2010, twice as much as gold, and 24 percent during the second phase ending in June 2011, three times as much. Silver will probably keep beating gold in the next several quarters, Morgan Stanley predicts.

“The recent announcements on the part of central banks really sparked the rally,” said Peter Sorrentino, who helps manage $14.6 billion of assets at Huntington Asset Advisors in Cincinnati. “Silver has now become a two-way play, getting bids both on industrial demand as well as a monetary hedge.”

U.S. Drought

Silver, used in televisions to solar panels, climbed 23 percent to $34.275 in London this year, beating gold’s 13 percent gain. It is this quarter’s best performing commodity. The Standard & Poor’s GSCI gauge of 24 materials rose 2.2 percent since the start of January and the MSCI All-Country World Index of equities gained 11 percent. Treasuries returned 2.4 percent, a Bank of America Corp. index shows.

Some investors buy gold and silver as a hedge against inflation and a weaker dollar. Inflation expectations measured by the break-even rate for five-year Treasury Inflation Protected Securities rose to the highest since May 2011 on Sept. 17. The U.S. Dollar Index, a measure against six major trading partners, weakened 7.8 percent since the end of November 2008.

The Fed said Sept. 13 it will buy $40 billion of mortgage debt a month and probably hold the federal funds rate near zero until at least the middle of 2015. Precious metals generally earn returns only through price gains, increasing their allure as interest rates decline.

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