Barclays, the UK-based financial services group, is planning to introduce a new silver Exchange Traded Fund (ETF) soon. It would follow StreetTracks gold ETF (ticker symbol: GLD), which has proved to be a very successful financial instrument after only nine months of trading.
However, there's a problem with the silver ETF. The Silver Users Association is trying to stop the launch of the new instrument. Why? There just isn't enough silver to meet the demand. So the fear is that the silver ETF would be the catalyst that leads to a very sharp rise in silver prices.
Silver has many practical uses other than being a precious metal investment. For example, it is the best conductor of electricity. It is also used for plasma screens, for photography, as a salt to kill bacteria in wounds, for jewelry, and has many other uses.
According to the Silver Users Association, as investors bought the new silver ETF, Barclays would have to match the amount by purchasing silver bars for storage in warehouses. Therefore, there wouldn't be enough silver available for industrial uses, resulting in a big shortage.
According to the Association, "A silver ETF would only exaggerate silver's illiquidity given the sheer volume of physical silver needed to be shipped and stored."
The Association pointed out that, in 1998, when Warren Buffett bought a reported 100 million ounces, silver prices jumped 30% in a month.
Central banks around the world have only small amounts of silver. And the United States government has been selling its silver reserves for years and now has to buy the metal just to mint U.S. commemorative coins.
So the silver ETF will be approved to trade on the New York Stock Exchange or it won't. Either way, it's a very bullish development for silver. If it is approved, more silver will have to be bought, further reducing an already tight supply. If it isn't approved, it will just serve to highlight a troublesome supply/demand imbalance.
Silver prices are likely to go much higher. And it wouldn't take much for it to happen. The metal has a history of being very volatile. For example, in 1971, silver averaged $1.55 an ounce. By January of 1980, it had soared to over $48 an ounce. And the supply of silver was much larger then than it is now.
One thing should be clear. The silver situation spells opportunity for astute investors.
Copyright 2005
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