Silver ETFs: 5 Reasons It’s the Metal with Two Faces

Silver is gaining appeal with ETF investors, thanks to its incredible versatility. It’s used in everything from photography to jewelry, it’s a safe-haven investment and it’s an efficient water purifier.

This week, precious metals did well because of a decline in the U.S. dollar and rising oil prices.

Melissa Pistilli for Silver Investing News reports that certain factors such as inflation, the pace of the global recovery and a return to the levels of growth in commodities demand that the world experienced prior to last year’s crash will impact the way silver is approached and marketed to investors. (More about silver can be found here).

Silver has a dual personality- it can be treated as a precious metal or an industrial metal. Here are some points about both approaches:

• Silver tends to rise as gold prices rise, particularly when gold is used as a safe haven. It holds monetary status and its low price relative to gold makes it much easier to acquire.
• Industrial demand can make silver more volatile than gold, which is why it tends to outperform gold in good periods but decline more sharply in bad ones.
• Some believe that silver’s price actions over the last year are mostly because of its precious metal properties, which serve it well when inflation fears are high and the dollar is weak.
• Silver is the best electrical conductor, the most reflective metal and the second-most malleable of all metals, and more patents have silver as a component than any other metal.
• Another factor to consider in supply and demand fundamentals is that above-ground silver supply levels were affected by the economic downturn as cash-strapped mining companies cut exploration, development and production operations.

For now , silver has enough support with the safe-haven appeal. For the silver market to sustain price levels above the $16 to $17 range, however, analysts say that we’ll need to see a rise in industrial demand.

• ETFS Physical Silver Shares (NYSEArca: SIVR): up 27.8% since inception



• iShares Silver Trust (NYSEArca: SLV): up 56.4% year-to-date



• PowerShares DB Silver (NYSEArca: DBS): up 55.8% year-to-date

Comments

[swsprime:]

Tom, you should be worried about Silver ETF paper.

According to the Morgan Silver Report the post war high point of world silver holdings was 1989. In that year the world had 2200 million oz of silver sitting in bank vaults. Since then the rising costs of mining the stuff and it's poor market price compared to Gold has reduced the amount of silver extracted from the ground and our stocks have declined.

The low point of world silver holdings was apparently 2005 when we held just 200 million oz of silver. Between 1989 and 2005 silver holdings were on a virtual straight line decline of 125 million oz per year as industrial silver usage and jewelry production was not fully replaced by newly mined silver. That's the thing about silver - its' a very important raw material and gets used a lot by industry whereas gold isn't used much -it just sits there looking pretty.

Now here's the strange thing - from 2005 to 2009 the world's holding of silver has suddenly 3x'd, and whereas we only had 200 million oz in 2005, we now appear to have 600 million oz . How come? Silver mines haven't radically increased output. The price of silver hasn't skyrocketed so that everyone is turning their silver jewelry into scrap silver. So where has all this silver come from?

Well interestingly enough silver ETF's started back in 2006, about the time the world's silver stock began its' sudden expansion. Could that be the source of these suddenly apparent new silver holdings? 'Hold on' I hear you say, 'they are supposed to buy an oz of physical silver for every oz of silver they write paper for...aren't they?' Well, let me see now, if I'm a marginal banker newly selling silver paper promises and I've got all these people buying my bits of paper saying IOU 1 oz of silver, do I really need to hold all that silver I'm writing paper for? In Fiat money banking the bankers only need 10% of the money they lend out to be in the actual bank vaults because banks lend deposits to each other, Couldn't ETF's lend deposits to each other? Or better still, sell silver IOU paper to each other and then claim the other ETF's IOU paper is silver stock? Who's going to check it anyway? Many ETF Documents of Incorporation don't specifically say that their silver has to be all physically held and externally audited. Maybe ETF providers think 'well what do investors really know? They trust Fiat paper (Good ol' US Dollars) don't they? Why not our ETF paper?'

One more point, according to the Morgan Silver Report graph, if the 1989/2005 reduction trend line of silver had carried on and hadn't made a dramatic turn in 2005, then the world should be about out of silver stocks just about now.

Hmmm... Think I'll buy a few more Silver Mining Shares.

Oct 11 09:46 PM

[Jimbo:]

There is also the story, current last year, That a well known Wall Street name sold certificates on silver to investors and charged fees to cover the "deposits". When some depositors requested physical silver, they got the run around. The "depositors sued, the Wall Street firm settled out of court. I have no confidence in metal ETFs.

Oct 12 10:54 AM