Silver ETF: Good Option for Silver Investors

Mar.28.09 | About: iShares Silver (SLV)

iShares Silver Trust (NYSEARCA: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 (NYSE: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 (NYSE: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).

slv1Click 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):

silver-usage1Click 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.