Hi-Yo, Silver Fund!
"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.