It's been a horrid week for silver as three margin requirement increases in just over a week, along with the bursting of the speculative fervor seen last week, come to an end. The WSJ is reporting this morning, that some prominent hedge fund managers - led by George Soros - have been dumping the metal. Recall Soros said gold is the ultimate bubble in January 2010.... only to have it be revealed in his next fund disclosure that gold was amongst his largest positions. [Feb 17, 2010: George Soros Calls Gold a Bubble, than Stocks Up On It] Not a coincidence as money managers now have to expect Fed induced bubbles, and play them - with everyone assuming they can get out at the door, once the music stops. It appears the parabolic move that silver enjoyed the past few weeks - after a steady climb from August 2010 when Bubble Bernanke declared he is adding inflating asset values as the Fed's third mandate - Soros (and a few others) decided the music was stopping. At least for now.
For silver and gold bulls the news is still positive. Infamous John Paulson says gold is headed to $4000 ....
- Silver prices plunged, suffering their worst one-day drop in dollar terms in three decades, as investors fretted that rising trading costs could cripple a market exhibiting signs of froth. Silver's fall of $3.50, or 7.6%, and a 1% drop in gold prices Tuesday came as some major investors have been selling. George Soros's big hedge fund, a firm operated by high-profile investor John Burbank and some other leading firms have been selling gold and silver, according to people close to the matter, after furiously accumulating precious metals for much of the past two years.
- Their selling suggested the sharp, nine-month run-up for precious metals could be entering more dangerous territory. Many investors have turned to gold, silver and platinum as the U.S. dollar has weakened. Precious metals often serve as an alternative to paper currencies. The dollar is down 8% so far this year against a basket of other currencies.
- Silver futures settled in New York Tuesday at $42.58 an ounce, after having flirted with $50 a few days ago. The metal now is down 12.4% over two days. Tuesday's fall was the worst one-day percentage drop since December 2008. Yet silver, which has had a huge run, remains up nearly 38% in 2011. It rose 84% last year.
- And some prominent investment pros continue to favor precious metals, among them hedge-fund manager John Paulson. Last week an exchange-traded fund, or ETF, that owns silver bullion—the iShares Silver Trust—was the most active ETF on the U.S. market on some days, a sign of the rabid recent interest in silver.
- Interest in holding the silver ETF grew so intense it became hard to borrow shares to sell, as bearish traders need to do if they want to sell the metal short and bet on a decline.
- All this helped set up the tumble, which started late Sunday, catching many by surprise. As sell orders flooded the market in Asia, brokers sought more collateral from investors who had bought on margin, even as they fielded calls from anxious investors who wanted to sell. Everybody wanted to get out, said Richard Digenan, an executive at R.J. O'Brien, a brokerage firm in Chicago.
- For those who invest in silver via the futures market rather than an ETF, exchanges and brokers have been raising margin requirements, the amount of collateral investors must leave with their broker to back a position. CME Group, a commodity-exchange operator, has raised margin requirements three times in a week. It announced the latest increase Tuesday.
- Many investors in silver futures make heavy use of borrowed money and were faced with either sending more collateral to their brokers or selling some contracts.
- For nearly two years, Mr. Soros's hedge-fund firm bought gold and silver, becoming the seventh-largest holder of the biggest gold ETF, the SPDR Gold Shares. Some others with stellar records—including Mr. Burbank, of Passport Capital, and Alan Fournier, of Pennant Capital—also have been passionate about precious metals, giving encouragement to individual investors to follow. Now they are selling, in each case for distinct reasons.
- While many who buy gold do so to protect against future inflation, Soros Fund Management bought gold to protect against the possibility of the opposite—debilitating deflation, or a sustained drop in consumer prices. But now the $28 billion Soros firm, which is run by Keith Anderson, believes chances of deflation are reduced, eliminating the need to hold as much gold, according to people close to the matter. People familiar with Mr. Anderson's thinking said he believes the Federal Reserve's continuing to pump money into the system has reduced the likelihood of deflation. The Soros fund has sold much of its gold and silver investments over the past month or so, according to this person.
- Mr. Fournier of Pennant also has sold gold because deflation appears less likely, say people close to the matter. In his view, the markets will force the Fed to end its easy monetary policy and start raising interest rates.
- Mr. Burbank, a longtime gold supporter who predicts growing worries about the creditworthiness of the U.S. and some other nations, has trimmed some of his investments to lock in profits, according to someone close to the firm. This person added that Mr. Burbank remains a long-term gold bull and expects to buy more gold-mining shares after a decline.
- A number of high-profile investors remain huge holders of gold and silver, amid continuing concern about inflation and the dollar. Mr. Paulson, known for his lucrative bet against mortgages a few years ago, told investors he still has most of his personal money in gold-denominated funds operated by Paulson & Co. Mr. Paulson told investors Tuesday morning that gold prices could go as high as $4,000 an ounce over the next three to five years, as the U.S. and U.K. flood the money supply.