China silver-fund manager issues risk warnings as premiums soar

Silver has more than doubled in value this year and hit a record above $62 an ounce on Thursday after the US Federal Reserve delivered a third consecutive interest-rate cut

The manager of China’s only pure-play silver fund has issued a rare series of warnings to investors about the risk of “significant losses” should the metal’s record-breaking rally come to an end.

The UBS SDIC Silver Futures Fund LOF is currently trading around 12% higher than the value of its underlying assets, a record premium over Shanghai Futures Exchange silver contracts that suggests a wave of speculative interest.

“Investors who blindly invest in fund units with high premiums may face significant losses,” the fund’s manager, UBS SDIC Fund Management Co., said in a warning on Thursday – its fifth such notice this month. Other than futures or the physical purchase of bars, the fund is one of only a few ways domestic Chinese investors can gain exposure to the white metal.

Silver has more than doubled in value this year and hit a record above $62 an ounce on Thursday after the US Federal Reserve delivered a third consecutive interest-rate cut. The metal has been buoyed by supply tightness after a historic short squeeze in October. In another sign of speculative momentum in China, the total trading volume for silver futures in Shanghai spiked this month to levels near those seen during the crunch a couple of months ago.

A scarcity of silver-related investment products in China has contributed to the fund’s popularity and the spike in its premium, said Song Jiangzhen, a researcher at Guangdong Southern Gold Market Academy. “This is very risky,” he said. “If silver prices correct, fund investors will see an even deeper correction.”

UBS SDIC Fund Management did not respond to a request for comment.

China’s is the world’s biggest consumer of silver, but the metal has long been seen more as an industrial commodity than an investment product. A blistering rally in gold this year, as well as silver’s own momentum, has shifted investors’ mindsets, Song said.

A rise in speculative activity this year, including on the broader stock market, has attracted the attention of Chinese authorities, who generally prefer gains to be more steady. Regulators want to “protect retail investors who need to experience a wealth effect to unlock their household consumption,” said Jinny Yan, chief China economist at ICBC Standard Bank Plc.

For now, excitement around precious metals has risen even further after the Fed expressed a more dovish tone for next year. “We are likely to see more new highs for silver in the next two to three months, but the risks are also higher as a lot of the investments become speculative in nature,” Song said.