Silver ETF: Good Option for Silver Investors

iShares Silver Trust (SLV) is the world’s larget silver ETF backed by physical stock of silver bullion. It trades on the NYSE Arca and is a good option for investors looking to invest in silver by means of an ETF. The sponsor of iShares Silver Trust (SLV) is Barclays Bank (BCS).

Backed by Physical Silver Bullion

As on March 23rd the iShares Silver Trust (SLV) held 8,180.44 tonnes of silver. This stock of silver is stored at SLV’s custodian — JP Morgan Chase (JPM).

Some commodity funds not only hold the underlying commodity, but, on top of that, trade on the futures contracts of that commodity on exchanges like COMEX. SLV doesn’t do this. SLV takes delivery of physical silver, which complies with London Bullion Market Association (LBMA) silver delivery rules.

There are other silver funds which take positions in silver by buying stock of silver mining companies. SLV doesn’t do that either.

Passive Investment Vehicle

This means that SLV is a passive investment vehicle and the price of the fund moves in tandem with silver prices. There are no fancy hedging or other active management techniques used by this silver ETF. The lack of active management means reduced expenses and fees.

SLV Price Movement

Here is a look at how the SLV ETF moved since September 2008. There was a 10:1 split on 21st September, so I am not including the chart which includes prices before that date (click to enlarge).

Silver Mining vs Supply

In the past seven years — silver mining has increased from 591 million ounces in 2000 to 670.6 million ounces in 2007, which is a growth of 13% at a CAGR of about 1.82%

At the same time the total demand has risen from 824 million ounces to 894.5 million ounces, which is an increase of 8.5% at a CAGR of 1.18%

The gap between total demand and total supply is matched by:

• Net Government Sales
• Old Silver Scrap
• Producer Hedging
• Implied Net Investment / Disinvestment

Source: World Silver Survey 2008

Silver Demand Segments

While silver is generally thought of as a precious metal, its industrial use exceeds its use in jewelery and coins. Here is a break-up of 2007 silver usage segments (click to enlarge):

This chart shows that the demand for physical silver is likely to be more stable than other precious metals like gold, which have a large component of discretionary spending built into their demand.

Source: World Silver Survey 2008

Silver Rally

Precious metals like gold and silver are getting increasingly popular because they are seen as effective hedges against stock market downturns. Like gold, silver is considered a good hedge against the stock market, as investors flock to safety in times of uncertainty.

The quantitative easing that the Fed is currently employing is expected to result in massive inflation and fall in the value of dollar. This is another reason precious metals like silver are gaining in popularity and seeing a rally.

Conclusion

The iShares Silver Trust (SLV) ETF is a good option for anyone who wants to invest in silver, but is not interested in holding huge quantities of physical silver. However, the prices of gold and silver have already gone up quite considerably and given the enormous interest in these metals lately — this may just be where the next bubble is forming.

Disclosure: At the time of writing I don’t hold any positions in SLV.

Comments

[Alan Young:]

Good article; thanks for the detail regarding management. The downside is that the use of silver in photography has been in a steady decline, creating a bit of a headwind for the investment value.

Mar 28 05:22 PM

[ManAboutDallas:]

Anyone who buys this dubious proxy for silver for any other purpose than casual speculation has oatmeal for brains.

Mar 28 07:01 PM

[Lawrence of...:]

And it is "dubious" because...?

Mar 29 08:47 AM

[Manshu Verma:]

@Aalan - That's a point worth keeping in mind.

@Man About Dallas - Why dubious?

Mar 29 11:52 AM

[snoopyjc:]

I prefer CEF, which holds it's silver and gold in Canada. Unlike SLV (and GLD), CEF's holdings are actually audited!

Mar 29 12:52 PM

[odessa88:]

Has anyone seen any proof of this 8,180.44 tonnes of physical silver?

surely anyone with anything to do with J.P Morgan would not lie right?

reminds me of......

"vote for me as president and ill bring all the troops home from Iraq within 6 months ."

Mar 29 03:01 PM

[Philo Beddoe:]

CEF is a nice gold & silver investment vehicle but not now at its current 16+% premium to NAV. I think you can get a lower price from your local coin dealer.


On Mar 29 12:52 PM snoopyjc wrote:

> I prefer CEF, which holds it's silver and gold in Canada. Unlike
> SLV (and GLD), CEF's holdings are actually audited!

Mar 29 05:53 PM

[Mad Hedge F...:]

You have one big fan. Howard Ruff is the irascible Mormon publisher of Ruff Times (www.cyrusfirst.com/gue...), which after 32 years is one of the oldest investment letters in the business, and one of the original worshipers of hard assets. He says that any investment denominated in dollars is a mistake, which is in a long term down trend. Silver is his first choice, which will outperform gold, and eventually top $50 from the current $12.50. Equities may never come back from their current slide. Don’t buy ETF’s because they may not actually buy the gold or silver they claim. The government is laying the foundation for a massive inflation which will begin in 6-12 months. You can’t say this guy isn’t entertaining.

Mar 29 08:26 PM

[deuxsous:]

SLV is great for trading and portfolio positioning. It beats CEF for sure. (Check Alberta tax policy history for potential CEF problems. That's where CEF has its HQ.) No problem with SLV at all, but also buy some bags of US junk silver coins (pre-1966) and Eagles in case the whole US Gobblemint and the international interbank market goes down and you need something of value to exchange for food and services in your town or city.

Mar 29 10:21 PM

[Erick Tippett:]

I've had this ETF (stock) and am inclined to agree with the oatmeal
for brains comment. David Morgan considered an authority on
gold/silver has warned on several occassions that these ETFs
in precious metals do not equate to ownership in real gold/silver
at all and amount to nothing more than paper investment in shares!

Just something to be aware of.

EDT
Chicago, Illinois

Mar 30 04:10 AM

[TERN:]

Is the silver bullion stored in London or in New York?

Mar 30 04:15 AM