Silver faithful taking $5 billion hit in crossfire

Policy Makers

Signs the U.S. economy is strengthening boosted speculation the Federal Reserve will curb stimulus that helped silver jump 91% since 2008. Fed Chairman Ben S. Bernanke said in May that the pace of the $85 billion in monthly bond buying could be reduced if the jobless rate keeps dropping. Policy makers will trim purchases to $65 billion in October, the median of 59 economist estimates compiled by Bloomberg this month shows.

“As the Fed continues to talk down the market and trim down quantitative easing, it will hurt precious metals,” said Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City. “Now that the Fed is talking about slowing it, it makes the market nervous. Unless you see a sustained rise in gold you will not see any improvement in silver prices.”

Gold may drop to $1,100 an ounce in a year, from $1,382.98 now, Credit Suisse Group AG forecast last month. Goldman Sachs Group Inc. sees gold at $1,345 in 12 months.

Price Swings

The slump in silver, mostly a byproduct in the mining of other metals, is crimping profit for mining companies. Shares of Mexico City-based Fresnillo Plc, the largest primary silver producer, dropped 41% in London this year. Coeur Mining Inc., which gets about 61% of its revenue from the metal, slid 43% in New York trading.

Holdings of silver in ETPs rose 1.1 tons this year, compared with a 1,621-ton expansion in 2012, data compiled by Bloomberg show. Further gains may be curbed as silver’s widening price swings dissuade investors. The metal’s 60-day historical volatility reached an 11-month high in April as it entered a bear market, the 11th in nine years, and climbed further since. It is now at 37%, compared with 29% for gold.

“Investor sentiment will remain poor going forward, as with gold, and the real risk will come from further ETP liquidation,” said Jeremy Baker, a senior commodities strategist overseeing about $800 million at Harcourt Investment Consulting AG in Zurich. “You have some decent areas of industrial demand, but you need to see significant uptick in those areas to really see any kind of flow through, and you’re just not seeing that at the moment.”

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