ETF investors and hedge funds can't seem to agree on this year's best-performing commodity.
While the price of silver is near the highest in five months and money managers are the most bullish on record, the rally has failed to convince buyers of exchange-traded funds backed by the metal. Money is flowing out of iShares Silver Trust, the biggest such ETF, for a seventh straight month, the longest slump in more than a decade.
Silver is a precious metal known as the poor man's gold because it's a fraction of the cost per ounce and has more industrial uses. The 14 percent gain in silver futures since December is the most of 22 raw materials on the Bloomberg Commodity Index. Precious metals have been bolstered by investor concern that President Donald Trump's policies in the U.S. or elections in Europe will disrupt markets. But Citigroup Inc. and Standard Chartered Plc say the silver bulls are overestimating the metal's upside potential.
"You have some conflicting things going on here and some different time horizons," said Mariann Montagne, a portfolio manager at Gradient Investments LLC, which oversees $1.4 billion, including assets in ETFS Physical Silver Shares. Investors who are steering clear of silver ETFs probably "think prices have gotten ahead of underlying industrial demand," she said.
Silver holdings by the iShares ETF are at a 13-month low of 328.2 million ounces. Investors have pulled $54-million this month, putting the fund on course for the longest stretch of outflows since it started trading in 2006.
Meanwhile, money managers boosted their net-long position, or the difference between wagers on price gains and bets on declines, by 5.5 per cent to 98,845 futures and options in the week ended April 11, the highest in U.S. government data going back to 2006. That helped propel prices on Monday to $18.655 an ounce, the highest since November. The contract for May delivery fell 0.3 percent to $18.225 at 8:11 a.m. in New York on Wednesday.
Signals that the Federal Reserve will stick to its dovish outlook on U.S. monetary policy have helped underpin precious-metals prices. Silver is "substantially undervalued" compared with gold and has room to appreciate, Gregor Gregersen, founder of Singapore-based Silver Bullion Pte, said last month.
An ounce of gold bought about 70.5 ounces of silver in the spot market on Tuesday, the most in almost a month and above an average of 62 in the past decade. That suggests silver still has potential to gain against its peer. The ratio was at 70.3 on Wednesday.
Still, a U.S. economic report on Tuesday dented the rally. Output at U.S. manufacturers fell in March by the most since August as production of automobiles and parts and business equipment declined, Federal Reserve data showed. Silver is used in industrial applications ranging from appliance components to glass coatings.
Citigroup expects losses for the metal. Analysts including Nell Agate said in an April 17 report that prices appear "overbought" and that "investor exposure still remains extremely elevated." The bank predicts that the metal will average $17.75 an ounce in the second quarter.
The outlook for increased availability could also weigh on prices. Total consumption will trail supply as mine production and recycling expand, resulting in a global surplus of 25 million ounces, according to a forecast by Metals Focus Ltd. in January.
April through June "could be a volatile quarter for silver prices," Suki Cooper, an analyst at Standard Chartered in New York, said in an email. "Even though industrial demand for silver has improved, the recent rally has been investor-led as opposed to industrial-demand led."