Prescient advisers called gold and silver plunge

Amid the agony and angst felt by those who took a beating in last week’s commodities meltdown, some financial advisers are patting themselves on the back for having steered over-enthusiastic clients away from gold and silver.

In recent weeks, demand drove precious metals, which are seen as a hedge against a weakening dollar and accelerating inflation, to new highs. Then came last Thursday, when a sell-off in commodities — particularly in silver — dragged down stocks.

The sell-off showed some signs of slowing on Friday, but never recovered their losses from earlier in the week.

Silver futures for July delivery fell $3.158, or 8%, Thursday to $36.23 on the Comex, after dropping as much as 9.6% to $35.60, the lowest since March 21. On Friday, July silver dropped another 95 cents, to $35.29 an ounce, down 27% for the week.

The sell-off was fueled in part by rapidly rising trading deposit requirements imposed by the CME Group Inc., the Comex’s owner.

Meanwhile, gold futures for June delivery on the Comex fell $29.60, or 2%, Thursday to $1,485.70 an ounce, after dropping 2.7% in the previous two days. Before that, the metal had gained 30% in the past year, reaching a record $1,577.40 on May 2 amid buying from central banks and rising investment demand.

The plunge in gold and silver, of course, was part of a much broader drop in commodities.

Oil fell 8.6% on Thursday to $99.80 a barrel, its lowest closing price since mid-March. Copper, meanwhile, shed 3% the same day.

Not surprisingly, the decline in raw-material prices crept into the stock market. The Dow Jones Industrial Average fell 1.1% on Thursday, while the S&P 500 sank 0.9%.

CORRECTION?

“This could be one of the most severe corrections that we’ve seen over the last year,” said Sean Corrigan, chief investment strategist at Diapason Commodities Management SA, which has about $9 billion invested in commodities. “If things get really bad, we could possibly retrace half of the rally of the past six to nine months.”

To be sure, gold and silver have been in long-term uptrends, accelerating in the past year as gold advanced by about one-third and silver more than doubled.

Prior to last week’s crash, technically oriented advisers had been worried about the parabolic curve of silver’s price chart — a rising uptrend that keeps getting steeper until it’s near vertical, as it was late last month.

Such patterns are typical of bubble markets.

“Especially in silver, the chart [showed a] bubble,” said Bryan Sadoff, an investment adviser at Sadoff Investment Management LLC, which runs $600 million.

Silver had the “same parabolic curve as oil did when it went to $150 [per barrel] or as the housing or technology bubble had,” he said.

DANGEROUS MOVES

The explosive run-up in precious metals — and their subsequent crash last week — should help advisers reiterate the dangers of chasing hot securities.

“We’ve certainly fielded more questions [from clients] in recent weeks and months about allocating to precious metals,” said Lane Carrick, a managing director with United Capital Financial Advisers LLC.

Mr. Carrick’s practice runs $400 million for clients, who have about 1% of their assets allocated to precious metals.

Lately, he has found himself dispensing a bit of advice often attributed to famed French financier James Goldsmith: “When you see the bandwagon, it’s too late.”

“It’s been the classic sign of a bubble,” Mr. Carrick said, with local street vendors out soliciting purchases of gold and silver, coin dealers advertising on TV and the mainstream press focused on the price run-up.

“The interest in gold is huge right now,” agrees Steve Rumsey, principal of Optimus Advisory Group, which manages about $35 million.

“It doesn’t matter what [the investment] is — if it’s going up, they want it,” he said. “Then when it collapses, they’re left holding the bag.”

SILVER BEAT GOLD

The interest among investors in precious metals has been intense — particularly as the media focused on how silver had been outperforming gold in recent months, said Kristin Hetzer, founder of Royal Palms Capital LLC, which manages $64 million in assets.

That attention created “tremendous speculation” in silver, with big trading volumes in the iShares Silver Trust (SLV), Ms. Hetzer said.

As for himself, Mr. Sadoff stays away from precious metals.

“They’re too risky,” he said, adding that he even shies away from stocks of commodities producers and miners.

But he watches commodities as an economic indicator, and the general rise in prices is bullish for the economy, he said.

“We’re not seeing the same pattern” of speculation in other commodities, Mr. Sadoff said.

A continued sell-off across commodities markets, however, could signal a weakening economy, he added.

Meanwhile, advisers are sticking with their precious-metal allocations, just like many did before the most recent run-up.

Ms. Hetzer is still bullish on silver, based on supply-and-demand factors. “It benefits from worldwide economic growth,” she said.

Mr. Carrick said investors need to be disciplined about having appropriate allocations to gold and silver.

As noted, his recommendation is to have a small slice in the metals, and larger allocations to real estate. Managed futures and alternatives add further inflation hedges for his clients.

“It’s just the nature of retail investors to chase performance,” he said.

This story was supplemented with reporting by Bloomberg News.

E-mail Dan Jamieson at [email protected].