The Curious Case Of Physical Demand For Silver Versus Gold

Includes: GLD, SLV
by: Tim Iacono

The diverging trends for gold and silver ETF holdings get more interesting each and every day.

Such was the case recently when, on Monday, the trust for the SPDR Gold Shares ETF (NYSEARCA:GLD) shed 15 tonnes of metal after the iShares Silver Trust (NYSEARCA:SLV) added more than 90 tonnes the Friday before.

Due to the 65-to-1 gold-to-silver price ratio, the dollar amount of the outflow from the former was far greater than the inflow for the latter, and this is consistent with the generally bearish mood in precious metals markets lately. But just the fact that the SLV trust continues to add silver after such a horrific price plunge this year speaks volumes about physical demand for the metal in the U.S.

In fact, with this 90 tonne addition, the holdings at the world's most popular silver ETF are now within a hair (actually 0.3 percent) of where they began the year, despite the price having tumbled by almost 40 percent.

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Compare this with the steady outflows from GLD as the gold price has fallen.

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This has become a real head-scratcher for many precious metals analysts but, as noted here last week, it is probably due to SLV and GLD buyers being two very different breeds.

By most accounts, the exodus from GLD has primarily come from U.S. money managers who, correctly, figured that U.S. stocks would fare better in 2013 after gold failed to deliver late last year when the Federal Reserve's latest money printing effort was launched. In contrast, SLV is likely held more by retail investors, many of whom like the convenience of the SLV ETF since storing large quantities of silver can quickly become problematic.

Continued interest in silver is also clear to see in coin sales from the U.S. Mint since the vicious precious metals sell-off in April. While sales of both gold and silver coins spiked when prices first fell three months ago, gold coin sales soon fell off, however, silver coin sales remained quite strong as recently as last month.

I stopped by the local coin shop the other day just to see what the mood was like and, as usual, they were pretty busy. When asked what's hot and what's not, the proprietor didn't hesitate in replying, "We're selling a lot of silver".

They aren't buying or selling much gold and few customers are showing up with the intention of parting with any silver - they're just selling a lot of silver.

But, why are gold and silver ETF flows so different?

When considering that there are surely some U.S. hedge funds and institutional investors who had some money invested in SLV, it's a pretty good bet that their selling has been about offset by buying from retail investors, all of which has resulted in virtually no change in SLV holdings so far this year.

What, if anything, does this mean for investors?

At 65, the gold-to-silver ratio is a bit higher than usual, so some investors probably see the poor man's gold as a better value and this surely bolsters demand for physical silver.

As for coin and bar sales, you certainly get a lot more ounces for your money with silver than gold and, for investors with thousands rather than hundreds of thousands of dollars to invest, this has great appeal.
Many Americans of ordinary means are no doubt uncomfortable with what they see going on in the financial world today and, in my view, this explains a lot of the U.S. demand for physical silver.

But, the steady silver ETF holdings at a time when prices have been tumbling are still something of an enigma.

When buying a precious metals ETF, there seems to be no reason to think in terms of ounces, so, getting more for your money can't be important. The process for buying 100 shares of SLV for just under $2,000 is identical to buying 10,000 shares for just under $200,000 - it's not like you are going to take delivery of the metal and then have to find a place to store it.

My guess is that the steady demand for SLV this year is due to the common man's concerns about the financial system moving up the socio-economic ladder. Enough investors with a few hundred thousand dollars to invest who feel the same way about the world as those showing up at the local coin shop with a few hundred dollars to invest probably accounts for much of the demand for SLV this year.

Of course, none of this will affect the price of silver since futures market traders are clearly in control of this over the short-term. But, it's a little unsettling to think that so many investors have such grave concern over what they see in the world today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I own silver and gold coins and bars.