China’s silver fund is plummeting after a series of measures to quell the frenzy

The value of China’s only pure-play silver fund fell by the maximum daily limit of 10% on Thursday, ending a frenzied bull run that had prompted the manager to issue a rare series of warnings. The drop in UBS SDIC Silver Futures Fund LOF follows weeks of gains labeled as ‘unsustainable’ by the fund’s manager, fueled by rising global interest in precious metals. Spot silver hit a record high of $72.70 an ounce on Wednesday and is on track for its best annual performance since 1979.

After the fund hit the 10% upside limit for three consecutive days this week, UBS SDIC Fund Management Co tightened the rules on Wednesday evening. New subscriptions for Class C shares – usually the vehicle of choice for short-term investments – will be capped at 100 yuan ($14.25) from December 26, down from 500 yuan, the fund manager said in a statement on its website.

UBS SDIC also reiterated several earlier warnings that the fund’s high premium to the value of its underlying assets – silver contracts on the Shanghai Futures Exchange – posed a risk of steep losses if silver futures reversed.

Silver has been at the center of intense investor interest in precious metals, with the dramatic rally in global spot prices gaining further momentum following a historic short squeeze in October. Gold, platinum and palladium have also risen, and other Chinese funds linked to the metals have also posted big gains and issued warnings to investors.

The silver fund has gained almost 220% this year, compared with a rise of about 128% in Shanghai-traded silver futures. On Wednesday, the premium on the underlying asset was almost 62%, compared to 7% at the beginning of this month. That level should fall Thursday as the fund’s value fell and futures gains widened. UBS SDIC declined to comment.