Commodity Slide Hits Silver ETFs – But Why?
A rough 2013 for commodities continues, and in many ways has intensified, in April. Products in a variety of segments have seen rough days thanks to a strong dollar and uncertain demand prospects from many key markets.
While much of the focus has been on gold and base metals, a few others have also begun to show weakness as well. This has been particularly the case in the silver market, as the white metal has seen some weak trading sessions over the past few weeks.
In fact, prices are now down almost 20% for the trailing one month period, levels that make gold ETF performance in products like GLD seem like bull runs in comparison. This is even more so the case this week, as some lackluster China data has kept silver prices depressed, especially when compared to their gold cousins.
Chinese data was quite weak signaling to some that the country might be seeing a slowdown in its manufacturing sector. The HSBC Flash Purchasing Managers Index, fell to a two month low of 50.5 in April, from a final reading of 51.6 in March, according to Investors.com.
This is important because it is just a tad above the key 50.0 level, which, if confirmed, could signal a contraction in the sector. A slowdown would then carry over to silver, as the metal has a bevy of industrial uses, unlike its more ‘safe haven’ oriented counterpart, gold.
Beyond the prospect of lower demand from a key user of the metal, it also doesn’t help that Morgan Stanley slashed their 2013 and 2014 silver price forecasts. Their outlook for the metal in 2013 plunged by 19%, while they pushed the 2014 price target lower by 15%, underscoring how weak they think the market will be in the near term.
Silver ETF impact
The advent of ETFs has made silver investing far easier for the average investor. Not only can the metal be played via a bullion route, but it can also be targeted by looking at miners as well.
However, these options have been terrible performers as of late, falling victim to the weakness in commodities and silver’s more localized issues.
The two most popular funds in this segment the iShares Silver Trust (SLV) and the ETF Securities Silver Trust (SIVR), have both lost 18.5% in the trailing one month period. Meanwhile, both are down about 23% YTD, leading the pack lower in the precious metals ETF market.
Beyond this, investors should also note that there is a silver oriented ‘white metal basket’ ETF on the market, WITE, which has also been impacted by this slump. The fund is down 14.9% in the past month, largely thanks to its significant holding in silver which accounts for just over half the portfolio.
Silver Mining ETF
Silver miners can often trade as a leveraged play on the underlying commodity. So, when the environment is bullish, mining ETFs can lead the way on the upside, but when bearishness reigns, these can lose more than their bullion counterparts.
Given the extreme bearishness in the silver market lately, investors shouldn’t be too surprised to note that the Global X Silver Miners ETF (SIL) has lost nearly a quarter of its value in the past month alone. And, the fund is actually down a shocking 40% in the YTD time frame, showcasing just how bad a leveraged performance on the metal can be during bear markets.
For those looking to play silver but in a potentially lower risk manner, there is now a covered call ETN that could be a decent choice. The product, the Credit Suisse Silver Shares Covered Call ETN (SLVO), debuted just a short while ago and could be a nice mix of income and silver ETFs.
The ETN looks to sell out of the money notional calls each month, while maintaining a notional long position in SLV shares. Via this technique, the ETN looks to play silver while still providing investors with a monthly income stream.
The product is a bit pricey at 65 basis points a year, and volume is still light for the time being though. Still, with the potential for a double digit yield and the rockiness in silver ETFs as of late, this could make for an interesting play.
Silver prices have been beaten down as of late, succumbing to the broad commodity weakness and the stronger dollar. This has led to extreme weakness in silver bullion ETFs, and especially so in silver mining funds.
To avoid this scenario, investors could consider the new SLVO which seeks to get rid of some of the risk in silver trading, while still providing investors exposure to the metal along with income. Either way though, it looks to be some rough trading in the near term for silver ETF investors, suggesting that extreme caution should be taken no matter what your longer term outlook is for the precious metal.