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Silver ETF

Hi-Yo, Silver Fund!
 by: J Square Humboldt

"Stay long precious metals" ...

I'm beginning to think that's Graeme Irvine's mantra.

He's the business columnist on Longer Life's Bourse page, and I'll leave it to you to discover his reasons for this four-word chant. Amidst Graeme's siren calls, I've taken notice of his recent daily listings of silver transfers. It seems that HSBC-Hong Kong is in the process of accumulating a substantially high percentage of the current market inventory. The range is something like 60%, an achievement I find as breathtaking as it is intriguing.

Why would that much of the world's investment-grade silver be moved to one depository? So far, I've not been able to find anyone willing to provide an answer. The accumulation is public knowledge, so I'm not suspecting a conspiracy.

I think most investors recall the Hunt brothers' clumsy attempt to corner the silver market three decades ago --- driving their Texan empire from billionaire to bankrupt within eight years --- and wouldn't think of trying to duplicate that stunt.

Super-investor Warren Buffet is, of course, much more sophisticated. His acquisition of 130million ounces of silver approximately nine years ago was made in tranches calculated to coincide with the market rather than drive it. All outward appearances indicate that he has no clandestine intentions; instead, he's simply substantiating his confidence in the metal and possible lack thereof in the long-term strength of the dollar.

Perhaps the HSBC-Hong Kong hoarding is a result of an announcement made in June 2005 by the United Kingdom's Barclay's Bank in which they filed their intent with the USA's Securities & Exchange Commission to establish an Exchange Trading Fund ('ETF') for silver. Specifically, the applicant is a Barclay's subsidiary, iShares Silver Trust, and the process gained momentum in January 2006 when the SEC approved their listing on the American Stock Exchange.

The Silver ETF is meeting with strong resistance, most notably by the Silver Users Association (SUA), who represent entities who make, sell and distribute products related to silver. Their complaint is that in order to support the ETF, so much silver would have to be taken out of the marketplace and held in reserve that its membership would be burdened by the metal's higher cost. As the SUA membership processes 80% of all silver produced in the USA, they represent a significant voice in this matter.

Ted Butler is one of the most respected silver analysts in the world. His opinion is that, no matter what the outcome of the Barclay's application, the entire episode is a positive development for silver investors.

First, let him explain how Exchange Trading Funds for commodities operate, and then describe how the Barclay's proposal is being positioned:

"In order to establish a commodity ETF, a financial institution buys and stores a quantity of the commodity in question and then issues shares of common stock at a fixed unit of conversion to represent fractional ownership of that commodity. In the case of silver, Barclays would buy the metal, in industry standard 1000oz bars, have them stored in London and elsewhere, and issue common stock shares in a ratio of one share of stock for every ten ounces of silver. The shares would then be traded on a recognized stock exchange, hence the name, exchange traded fund. In the case of the Barclay's Silver ETF ... they’ve even decided on the stock symbol, SLV. The amount of silver bought and stored would increase and decrease depending upon the investment demand for the shares, similar to how the gold ETFs currently function."

The practicalities of a silver ETF include:

- Stock certificates are certainly easier for the investor to store than the metal itself, and

- The 'common stock' format allows more categories of investors the eligibility to participate.

What is interesting about the Barclay's proposal is that its goal is to put 130million ounces of silver into reserve, the exact level of Warren Buffet's holdings. Could they be using that precedent as a model? Burton notes that even though Buffet was careful not to disrupt the market, the price of silver still doubled during that accumulation. Furthermore, Burton says, "I see nothing in the Barclays prospectus suggesting such buying restraint, either in time or price."

So, Butler reasons, this makes the situation most favorable for involved investors:

"This silver ETF announcement is a true win-win for silver investors. (If) their silver ETF becomes effective, the impact on the price of silver will be great. That’s win number one, obvious and straightforward.

"But if ... this ETF never sees the light of day, that will be a big win as well for silver investors. Why? Because it will prove for all to see just how critical the supply/demand and inventory situation is in silver. If the government says no way to this ETF, it will be for one reason only – there is not enough real silver in the world to fund it."

Either way, it's a development worth watching. Graeme lists the Comex figures daily at the end of his column and always mentions when another allotment of silver moves to HSBC-Hong Kong. The growth of those figures could well be the 'tracer' of things to come.

Stay long precious metals.

About The Author

Copyright 2006 – The Longer Life Group

J Square Humboldt is the featured columnist at the Longer Life website, which is dedicated to providing information, strategies, analysis and commentary designed to improve the quality of living. His page can be found at http://longerlifegroup.com/cyberiter.html and his observations are published three times per week.

upplysning@longerlifegroup.com

This article was posted on February 06, 2006
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