The Silver ETF and the Danger of Buying Silver Stocks (ETF: SLV; Stocks: CDE, HL, PAAS, SIL, SSRI, WTZ)

David Jackson, Founder of the Seeking Alpha Network, writes: Contrarian investors always ask themselves what the sentiment is on a stock, or what's "priced-in". Bullish sentiment on a stock usually means that surprises are likely to be downside surprises, driving the stock down. Bearish sentiment on a stock means that surprises are likely to be upside surprises, driving the stock up. One way of guaging sentiment is to look at what people are saying and publishing. And this is exactly why I'm nervous about the recent discussion of the silver ETF and the outlook for silver stocks.

You see, I've noticed a stream of articles recently arguing that the silver ETF currently in registration by Barclays Global Investors (the proposed ticker symbol is SLV) will have a dramatic impact on the price of silver.

The argument is this: Silver supply is constrained, and most demand for silver is for industrial uses. A significant increase in investment demand for silver therefore would tip the supply-demand balance and drive up the price of silver.

You can read this argument in its full force, and see the publicity given to the silver ETF in the following articles:

1. Silver ETF Controversy Recalls Bunker Hunt Fiasco (ETF: SLV)
2. Planned Silver ETF Draws Opposition (ETFs: GLD, IAU, SLV)
3. Why the Silver ETF Will Drive Up the Price of Silver (ETF: SLV)
4. Pan American Silver Comments on the Impact of the Silver ETF on the Silver Market (PAAS 3Q05 Conf Call Quotes, ETF: SLV)
5. What’s Happening with the Silver ETF? (Proposed ticker: SLV)
6. New ETFs could boost the price of commodities
7. The impact of the silver ETF (SLV
8. Barclays files for first silver ETF - ticker SLV

Here's the key point: Maybe the silver ETF will drive up demand for silver. But so much has been written about this issue already that it's probably priced-in to the silver stocks already. (An aside: looking at the number of articles listed above, I'm very proud that the Seeking Alpha Network -- in this case the Gold Stock Blog and ETF Investor -- has the best coverage of the silver ETF without exception.)

One other factor that many may be forgetting. The ETF sponsors tend to buy the assets that underlie a new ETF ahead of the launch. That's why, for example, Mitsui Metals analyst Andy Smith argued that the price of gold would fall after the launch of the gold ETF. The ETF sponsors estimated the future demand for the ETF and purchased gold ahead of the launch. Once the two ETFs were launched, the gold buying from the ETF sponsors temporarily dried up. And if my memory serves me correctly, Andy was right: the price of gold did indeed fall.

The message for investors: think carefully before you buy the silver mining stocks CDE, HL, PAAS, SIL, SSRI and WTZ on the argument that the silver ETF will drive up the price of silver.

Related:

• Nick Perry's articles on the Seeking Alpha Network follow exactly this contrarian approach to investing: look at current sentiment, and do the opposite.
• Articles about the gold ETFs, GLD and IAU.
• Other articles from The Gold Stock Blog (in beta, though the RSS feed is up and running).
• The complete list of ETFs and closed-end funds (and links to articles about them) covered by ETF Investor.

« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »

Comments

[Nick Hodgson:]

If one ever wonders why so many South Americans hate the trading policies of the US look no further than this silver Users association trying to prevent free enterprise trade silver via the Barclays ETF.
There are many large and small silver mines in South and Central America in mothballs or closed because the price has been so low for so long. Just drive through the many historic silver mining ghost towns in Mexico , to see this evidence.
For every mine worker creating commodities over 6 to 10 jobs are created depending on the countries infrastructure.
In Australia for very mine worker 10 service industry jobs are created from school teachers to truck drivers etc servicing the mines needs and staff.
If silver were to go up in price over 14 dollars an ounce then well over 300,000 jobs would be created in the silver mines south of our border alone. And the SUA says that they would lose jobs!!
Again no wonder we are so loathed for trying to manipulate commodities to our convenience. I hope the SEC thinks of the rights of the miners and the countries that have explored and discovered their silver deposits.
It is both unethical and illegal to prevent mechanisms that may allow increased demand to occur for any commodity.
If demand is suppressed eventually the free market will explode as it finds an alternative venue to express itself. If Barclays is not allowed to take the initiative then I hope they sue the SUA for malicious interference in its business plan by the SUA s efforts to maintain its monopoly. Or better still let some workers representative group from one of the silver rich
countries take the SUA to some world court for preventing them from getting jobs.
The sad fact is the stockpile at present decline rates will be empty within 2 years and then the price will truly go nuts.
Also there are a lot if Indians who own silver as an investment and should have every right to sell their heirlooms if the price appreciates. Either way the market will cater to creating the correct balance on the silver price what ever it may be. But if anyone tries to stop free trade of it they are creating problems such as these silent ghost towns that should be vibrant societies strengthening the economies of the nations they sit in.
So lets have some orderly price rises know so that these miners can get some jobs and lets help them to stop loathing Americas monopolizing self serving mechanisms.

2005 Nov 16 11:14 PM