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A Sane and Sober Look at the (Possibly) Coming Silver ETF
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(February 25, 2006) In 1980 the Hunt brothers attempted corner on the silver market imploded, and for years afterward the phrase ‘silver investor’ could hardly be uttered without a snicker. Silver became 'semi-precious,’ and traded around $5 for nearly two decades. Today, however, at $9 and change, something is up...
Like much of the commodity complex during this century so far, silver prices have been rising, and finally broke out of a two-decade long price slump in 2003. But the past few months move in silver towards an 18-year high owes a great deal to the prospects of a new vehicle for investing in silver, an ETF proposed for listing on the AMEX. If it goes through, ordinary folks who don’t own their own personal bonded warehouses will be able to stake a claim to some pure silver through their online brokerage account, clicking a mouse to make a purchase, avoiding entirely the hassles of trading futures or taking delivery.

Today, Barclay’s Global Investors Investors International, Inc, has a proposal before the SEC to list and trade an ETF (Exchange Traded Fund) which will be denominated in units representing 10 pure ounces of the element silver. This ETF has been over a year in the making, and the SEC has undertaken a comment period for the proposed entity (iShares Silver Trust, or SLV).

Reading from the Prospectus:

"The iShares Silver Trust issues shares representing fractional undivided beneficial interests in its net assets. The assets of the trust consist primarily of silver held by the custodian on behalf of the trust. The objective of the trust is for the shares of the trust, called “iShares®”, to reflect the price of silver owned by the trust less the trust’s expenses and liabilities. The iShares are listed and trade on the American Stock Exchange (the “AMEX”) under the symbol “SLV”."

Could there possibly be a field riper for such a change than silver? Certainly there is nothing more cumbersome than the acquisition and storage of physical silver bullion. A purchase of $100,000 in gold would fit in a woman’s purse, while the same dollar amount of silver would involve hiring a truck to haul it to its destination. And exactly what destination would be practical for your newly acquired, 800-pound stash of silver?

Although a silver ETF seems to be both natural and necessary, its implementation is not yet a done deal – and there may be roadblocks. One of the main obstacles to this proposed new ETF is an organization known as the Silver Users Association. Its executive director, a Mr. Paul Miller, was quoted by Resource Investors as saying that “So much silver would be taken out of the market place, which in turn, means higher costs to companies that use silver,” Mr. Miller went on to say that, among other consequences, this would lead to “lost jobs” and “obviously higher prices.” Mr. Miller’s employer, the SUA, sums up their position about the proposed ETF on their website:

"The Silver Users Association opposes the creation of a silver ETF because of the concerns that doing so will require the holding of physical silver be held in allocated accounts, thus removing large amounts of silver from the market. By doing so, the ETF will cause a shortage of silver in the marketplace. If this happens, it will ultimately be the economy that suffers due to the negative impact taking large amounts of silver out of the market will have on industry."

The Silver Users Association rightly fears the prospect of a silver ETF, as it could change everything about speculating in silver. Including, in their view, the fact that it will drive up the price of silver unreasonably.

Undeniably, that‘s a fundamental positive for silver. Certainly the poor white metal is overdue to have its day in the sun. And just for their sheer perseverance, long-suffering silver holders deserve our respect. Is this, finally, their time?

Lately, booming prices for silver have engendered a giddy mood of silver market optimism among the plethora of silver bulls, brokers, investors, newsletter writers, and Internet investment mavens out there. Just like at every bull market event, the main action is driven by the players on the field - but inevitably you have cheerleaders, hawkers, camp followers, and gawkers standing on the sidelines, and often their knowledge of the game being played is not always the keenest.

With that in mind, let’s play devil’s advocate, and take a cold, hard look at the silver picture.

First, despite all the talk about silver being lost, consumed, or used up, no one takes old silver coins or bullion, or Aunt Edna’s sterling tea service, and drops it into the dumpster. Although it’s not nearly as precious as they might imagine, everyone knows that silver is a precious metal.

There is much talk about how much silver is ‘consumed’ in industrial uses these days, and certainly there is a fraction of a gram lost when you dispose of a cell phone or old computer. And although silver recycling became standard procedure when prices started to rise in the 1960s and 1970s, there is no doubt that some industrial silver is lost to practical recovery.

Probably about the same amount, annually, as that lost by kids when their lunch money, in the form of silver dimes, spilled out of their pocket on the playgrounds of America fifty years ago. At that time, everyday coinage was made of silver, and had been from 1793 until the day that the final silver coin was struck in 1964. In that year alone, over 222 million ounces of silver were used by the US mint just in the making of silver quarters. For most of our history, right up through the 1960s, every store, bank, purse, collection plate, vending machine, piggy bank, dresser drawer, and trouser pocket jingled with the stuff.

Although you don’t see much silver around the house anymore, at one time, it was pervasive in the US. Sterling flatware sets were a staple of middle-class homes in America for most of the 20th century. More affluent folks had sterling tea sets, candelabras, statuary, and all manner of silver bric-a-brac scattered around their homes.

And since then, none of it has been purposefully thrown away. What do you think fills all those safe deposit boxes at your local bank? Mostly silver, in the form of bags of coins, coin collections, bullion, and flatware, all the silver treasures that were chased into hiding during the run-up in prices during the 1970s.

Now, take the tons of silver in your local branch bank, and multiply it by the thousands of banks nationwide that provide safe deposit boxes. That’s quite a bit of supply, right there. And none of it is officially recorded as part of the oft-cited silver warehouse stocks. Instead, it is simply hiding in the dark, waiting for a price, or a funeral.

As for the mining supply, the common myth for decades has been that silver prices are too low for anyone to mine the stuff. And at $5 per ounce, that was true, at least in the mostly played-out silver deposits in the US. But in Mexico and South America, where miners can be paid in the local fiat paper, and the silver sold for US dollars, silver was in practice never too cheap to mine.

In fact, you don’t actually need a silver mine, in order to mine silver.

That may sound paradoxical, but as long as copper is being mined anywhere, silver is the almost inevitable by-product. With copper prices now over $2 a pound, roughly triple the levels of a few years ago, new copper mines are being explored, and old ones re-opened, at a pretty brisk pace these days. Silver is just a bonus that augments the copper yield, and comes onto the market no matter what the price.

And if you ever read some ‘expert’ tell you what the ‘unmanipulated’ gold to silver price ratio is, unplug your computer, go outside, get some fresh air and try to clear your head, because any talk of sacred ‘ratios’ is pure bunkum. For instance, the 16 to 1 silver/gold price ratio set by the US Constitution in 1789 is often invoked as sacrosanct, to be considered a universal proportion like the Golden Triangle, an immutable number like pi, according to some of the silver sages of cyberspace. Truth is, for the past couple of decades, the gold/silver ratio has fluctuated between 50 to 1 and 100 to 1. The ratio of 16 to 1 was true enough in the 18th century, but going further back to the early part of the 16th century, before the mountain of silver known as Potosi began to give up its riches, the ratio hovered around 8 to 1. Going back to Biblical times, 4 to 1 was prevalent. In ancient Egypt, the rule was closer to 2 to 1.

In short, since the beginning of recorded history, the spread between the prices of gold and silver has done nothing but grow larger and larger.

Silver’s gloomiest days probably occurred when silver prices actually dipped below $4 per ounce in the early 1990s. With flatware made of stainless steel, coins struck of copper and nickel, and cameras going digital, the question was, would silver go obsolete?

In all fairness, we at Onlygold actually have a warm spot in our hearts for silver. We are old enough to remember silver coins jingling in our pockets, and the days when a ‘pocket full of silver’ actually hinted at personal prosperity. An American silver dollar was once respected the world over, and the British ‘pound sterling’ likewise represented real money. Rich people were said to be born with a ‘silver spoon’ in their mouths, and a ‘silver lining’ was a positive thing.

Silver prices have actually doubled over the past five years or so, as have gold prices. You are reading this commentary at a website called Onlygold.com instead of Onlysilver.com, not only because gold is prettier than silver, but because we feel that gold, being compact and portable, is more practical for those wishing to diversify out of dollar holdings. We thought it well put when we read somewhere last week,

Gold is the perfect insurance when you are not exactly sure what it is that you are insuring against.

So what is silver really worth today? It is certainly starting to seem more precious here in the 21st century, and some major players such as Warren Buffett and Bill Gates have both shown interest over the past few years. And, of course, silver goes up when buying power overwhelms selling power. It goes down when sellers trump buyers.

Evaluating the future price prospects of silver is no more an exact science than determining the ‘worth’ of a common stock. The perception of future value defines current value. In the end, a thing is worth what someone will pay for it.

Silver, with the successful launch of its new ETF, will likely expand in popularity, when the investor is given a chance to buy it without its historic attendant hassles. Investment demand will inevitably expand when an easily traded form of silver is available to everyone.

There is no doubt that if this ETF is approved, and Barclays begins to stash away physical supplies of silver to back it, the market will quickly validate the fact that there is a very small supply of silver currently warehoused in registered depositories. Which means that it will take higher prices to bring out an increasing supply from private hands.

In short, however you might view silver’s fundamentals, and even discounting the possibility that the silver ETF may not have the level of success enjoyed by the gold ETF (GLD, which in its first year of existence absorbed 8% of all the gold mined in the world that year, some $3.9 billion dollars worth), it seems inevitable that, if SLV is given approval, silver should have quite a run in the year 2006, and perhaps for quite some time beyond.

 

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