Precious metals craze prompts China fund to turn away investors

A global frenzy for precious metals has provoked extreme measures in China’s investment landscape, with the country’s only pure-play silver fund turning away new customers after its repeated risk warnings went unheeded.

The UBS SDIC Silver Futures Fund LOF will be closed from Monday for subscriptions to Class C shares, preferred for shorter-term trades. The fund’s manager announced the unusual step in a statement Friday after multiple actions – from tighter trading rules to cautionary advice about “unsustainable” gains – failed to quell an eruption of interest fueled by social media.

UBS SDIC Fund Management Co. had become increasingly concerned that investors could be exposed to heavy losses should a record-breaking bull market suddenly turn. The fund’s premium ballooned earlier this week to more than 60% over the value of its underlying assets, silver contracts on the Shanghai Futures Exchange.

The episode shows how a small corner of the precious metals market is grappling with an extraordinary end-of-year price rally that has seen gold and platinum join silver in a dash to eye-watering records. It also shines a light on the continued heft of China’s retail traders and their limited options in pursuit of investment trends.

In China, the world’s biggest consumer of silver, the metal has long been viewed more as an industrial commodity than an investment product. But the rally in precious metals – including silver’s own momentum on the global market, where it has gained around 150% this year – has shifted mindsets, with social media playing a role.

Investors were already flocking to the fund as a rare domestic avenue for exposure to the white metal when a series of posts on Xiaohongshu – a platform also known as Rednote – offered tutorials on how to play the arbitrage between the fund’s over-the-counter and on-exchange shares.

The surge has seen “significant involvement from retail investors,” said Yang Ruyi, a fund manager at Shanghai Prospect Investment Management Co. “Behaviors such as arbitrage tutorials on social-media platforms have also fueled the spread of speculative hype,” she said.

For three straight days this week, the fund hit its upward limit of 10%. This prompted UBS SDIC on Thursday to restrict Class C subscriptions to 100 yuan ($14.26), down from 500 yuan. The fund then fell by its maximum daily limit.

As a result, the premium retreated to 44% – but this was still up from just 7% at the start of December. The latest restrictions announced Friday will likely reduce the premium again, with the fund having dropped by the maximum 10% for a second day. The fund manager also reduced the maximum regular subscriptions for Class A shares to 100 yuan from 500 yuan, starting Monday.

The silver fund is not alone in experiencing an investment frenzy in the early part of this week, which saw a wave of limit-up rallies by so-called listed open-ended funds, or LOFs. These resemble mutual funds on a stock exchange, which can be traded between investors on the exchange or via subscriptions and redemptions directly with the fund company.

The UBS SDIC fund has gained 187% this year, compared with a roughly 145% increase in Shanghai-traded silver futures. That gap has narrowed significantly since Wednesday.

UBS SDIC declined to comment.

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