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Bernanke Testimony Pushes Silver ETFs Lower

Eric Dutram

Ben Bernanke was on the Hill today, giving his semiannual monetary report before the House financial services committee. In his testimony, the Fed Chairman revealed that he anticipates bond tapering to begin this year, though he is still looking for an extremely accommodative policy to be the norm even if bond buying reductions take place in 2013.

Beyond bond buying updates, the Chairman also highlighted a bit on the committee’s target for inflation and how they will get back to the 2% yearly goal. Based on the testimony, it seems pretty clear that high inflation rates aren’t much of a concern for the FOMC and that, if anything, more must be done to get back to the two percent target (see more of the highlights of his testimony here).

Market Impact

This report helped to boost stocks modestly across the board, with broad indexes adding a little bit on the day, while the Ten Year also retreated to near the 2.5% mark, producing some bond gains as well. However, the news wasn’t exactly well-received by many in the commodity world, and particularly so in the safe haven segment of the metal market.

Here, products like gold saw losses exceeding one percent on the session, as investors sought riskier assets for the current market environment. Beyond gold though, the real loser was in the silver market, as the white metal fell sharply following the Bernanke testimony.

This was probably because silver is a bit of a hybrid metal as it has both safe haven and industrial properties. Due to this, the metal can be more volatile than gold, while it often acts as more of a safe haven than other white metals like palladium and platinum (read Precious Metal ETFs Crumble in Fed Meeting Aftermath).

This really came into play in today’s trading session, as silver, like gold, struggled on weakened demand for safe havens, as it is clear that both inflation will remain low, and that the risk on trade is back. However, growth looks to stay at a low level too, suggesting that silver industrial demand—especially when considering emerging market weakness—could be under pressure in the months ahead.

Silver ETFs Impact

With this bearish situation for silver, ETFs tracking the metal sunk in Wednesday trading. The top asset fund, SLV, lost about 3.5% on the session, while other silver ETFs, like SIVR and DBS fell by similar amounts as well (also see A Safer Way to Invest in Precious Metal ETFs?).

Meanwhile, in terms of leveraged products, the double leveraged AGQ lost 6.8% while the 3x USLV lost just over 10%. On the short side, the duo of inverse daily resetting funds, ZSL and DSLV, were both star performers, with the -2x ZSL adding about 7.1% and DSLV jumping higher by over 10% in the session.

Clearly, silver led the way lower in what was otherwise a pretty lackluster session across the board, pushing the metal lower than its counterparts over the trailing five day period:

Bottom Line

While Bernanke’s testimony was relatively well-received by the markets, not all corners of the investable world gained on the news. In particular, the commodity segment faced some severe weakness, led by silver (also see How to Short Silver with ETFs).

Silver ETFs were among the biggest losers due to their role as part safe haven, part industrial metal. This combo was pretty poor today, as there was lessened safe haven demand as well as concerns over growth, two factors which led the metal sharply lower in the session. Clearly, silver will either need a robust economic outlook or heightened inflation to come back for gains to be seen in this type of market environment.

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