More Silver Analysis
Alain from Montreal sent me a nice link today to a report done by CPM sent by Endeavor Silver Corp to all their Investors. They claim this report is a "rational and succinct analysis on Barclay's Silver ETF".
Check it out:
2March 2006
No. 2006 – 2
Silver ETF Approved
The U.S. Securities and Exchange Commission approved the American Stock
Exchange’s proposal to list iShares Silver Trust shares, to be issued by Barclays Global
Investors. The ruling was dated 20 March and was released on the morning of 21 March.
The silver market reacted by rising 20.3 cents to $10.565 in afternoon trading. Prices rose
a few more cents in Wednesday morning trading.
When the SEC posted the Amex proposal in the Federal Register on 23 January 2006,
opening the period for public comment, the price of silver was $9.073. The opinion of
these reports was that an approval could push silver to $10.50 or $11.50, at least on a
short-term basis on the news, while a rejection could have put silver back to $7.50. In the
intervening weeks silver prices rose to around $10.50, largely on speculative anticipation
that the silver ETF would be approved. Thus, the price had achieved its near-term target
by the time the news was out.
Barclays now must submit a Registration Statement to the SEC for approval, before the
Silver Shares, as it will be called in the market, can start trading. Such a document ought
to be ready for submission. Approval could take a couple of days or a matter of months.
Typically in such a situation the document is prepared for submission, and approval can
come quickly.
The market is seeking to assess the short and long term implications for silver prices with
the arrival of the Silver Shares. The law of unintended consequences suggests caution be
applied to such analyses. Several points can be made considering what the Silver Shares
mean to the market.
They represent a way for investors to buy silver. As such, they could be thought of as
creating a new form of demand for silver, a sub-segment of investment demand. The gold
ETFs that have been launched progressively around the world have seen an influx of new
investors who formerly did not invest in gold. That may be the case for silver, but to a far
lesser extent. Silver is not so much a mainstream investment product or asset, as is gold.
There are a lot of investors who like to buy silver. This is true. Many are deeply
suspicious of financial institutions, however, and may avoid the silver ETF, preferring physical control over their
silver. Some institutional investors are likely to buy into the silver ETF, however, and that alone should increase
demand for physical silver measurably. (The silver ETF will be backed by physical silver held in allocated accounts.)
How much silver will be purchased via the ETF is anyone’s guess. The gold ETFs have attracted around 15.5 million
ounces of gold, roughly three times what most observers had expected them to attract. They came out in 2003 and
2004, however, at a good time in the current bull market for precious metals. The Silver Shares will be coming to
market at a time when silver prices already have roughly doubled over the past few years. That may limit the interest
in them, along with the more exotic nature of silver for some institutional money managers.
The proposal for the Silver Shares suggests an initial inventory of at least 1.5 million ounces backing the shares. That
is very little. In reality, the demand for these shares may take 30 million ounces or more. No one can know exactly
what the demand level could be. There will continue to be some speculative buying of silver between now and the
actual launch of the ETF. Once the ETF is launched the market will be better able to assess the level of demand, and
the sustainability of demand, for silver investing via the ETF. The proposal used a figure of 130 million ounces, but
that was just an indicative figure. It is possible that the demand for silver for allocation against the Silver Shares may
be significant enough to drive silver prices sharply higher on a sustained basis. It also is possible that the silver ETF
may prove to be of relatively less significance to the price of silver.
Their last sentence though strikes me as nearly impossible. If someone is trying to buy a large chunk of existing silver resources, how can that not have an impact on the price?