A Look at the Gold and Silver ETFs - Part II

Read Part I here.

Silver Bullion, the SLV ETF, and Silver Bars

Like gold, the relative prices for the various forms of silver bullion have also undergone some significant changes over the last year or so. As was the case for gold during the last review, there wasn't much to see in either the basic price chart or in the review of differences between the prices but, in this update, the separation between physical bullion (in green) from both the spot price (in blue) and the SLV ETF (in red) can be clearly seen below.
Note that, in the chart above, the green line now clearly rides "on top" of the other two curves, whereas, it had been even with or below the other two curves for most of the last two years.

Looking at the differences between these three prices in 20-day moving average form below (to filter out the noise) reveals that nearly all of the relative changes in silver prices can be attributed to the way CNI has been pricing their silver bars. In fact, the spot price compared to the SLV price (in blue) has been relatively stable - up from just a few cents per ounce to about 15 cents per ounce over the last year, roughly an increase of about 0.5 percent, which is in line with the fund's stated expenses of 0.5 percent (see the iShares website for details).

Questions that are repeatedly raised about the SLV inventory aside (see Ted Butler's latest commentary for more on this), these fees are actually quite a bargain when considering the problems associated with storing large amounts of silver.

The reason for the big move upward in the 100 ounce bars at CNI (in red and green above) is simply due to a pricing policy change at CNI which does not necessarily exist elsewhere. Since I've owned the silver bars and the SLV ETF for some time now, I can easily get the year-to-date performance for the two and, not surprisingly, the silver bars are now up 30 percent in 2008, whereas, SLV shares are up only 27 percent.

This may or may not have something to do the recently reported shortages in silver bars - I see that CNI now has silver bars for sale, whereas, it did not have any some time ago (see Volume III, Issue 12).

In talking to a coin shop dealer in Northern California last week, I learned a few interesting things, one of which was that groups of coin dealers do a lot of buying and selling between themselves, in effect, "making their own market" and these market prices can move relative to spot prices (as shown above) and relative to other coin dealers.

For example, every coin dealer I spoke with recently was paying under spot for silver bars - from 30 cents per ounce under spot to almost a dollar per ounce under spot - whereas CNI now buys for about 40 cents over spot. Unfortunately, I now live almost 400 miles away from CNI where the best prices for silver bars are to be found and may find myself making this trip for any future sales since the difference is so great.

[Note: As mentioned previously, I am still in a very long process of switching out some physical silver for SLV shares in my personal investment portfolio and, with the price of silver rising lately, I've been calling coin shops in Northern California but can't even get close to the CNI price for silver bullion.]

Conclusion

Aside from the price offered for silver bars at CNI relative to other coin shops, there is nothing really shocking here in any of the charts. In fact, it is good to know that things are about what you'd expect - you can see the ETF expenses eating away at gains, albeit at a very reasonable rate of about one half of one percent.

As stated here many times before, physical possession remains my preferred form for holding gold and silver bullion, however, there are many factors to consider when making this very personal decision and subscribers are again referred to the Buying Bullion article from earlier this year for details (see Volume III, Issue 5).

Overall, bullion has been a tremendous investment over the last six or seven years and, since the model portfolio was formalized late in 2005, this category has gained 84 percent.

Full Disclosure: Long 100 oz silver bars and SLV at time of writing.

Comments

[Pot o' Gold]

good article overall, somewhat troubled by the switch from outright physical to SLV

James Turk and others have documented the monkey business with SLV and how it may be used by the large Crimex aka Comex shorts

[User 30121]

Physical, physical, and MORE physicial possession....ONLY! Appreciate the article, Tim. You are a SOLID read!

[JCCIII]

Tim. Have you considered buying/selling from/to Affordable Jewelry & Precious Metals (ajpm.com)? Is yes/no, any comments? Thanks.