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« The Risk of an Unorderly Default | Main | Our Economic Future: From Best to Worst Case »

Silver ETF gets help from its friends

Globe and Mail Logo 08 June 2011.JPG

We found this in The Globe and Mail this morning, an interesting read and certainly food for thought, Chinese walls and all!

Silver and BlackRock’s silver ETF, iShares Silver Trust ETF (SLV-N36.03-0.09-0.25%), have been the target of some wild rumors in the past several months.

The crazy stories have run the gamut around the financial blogosphere. One has JPMorgan as a puppet of the Federal Reserve, establishing a huge proprietary short in silver designed to pressure the dollar and reduce costs of monetary easing.

Others have BlackRock(BLK-N189.690.050.03%) unable to satisfy its share demand with real silver stockpiles. Many claim that legitimate storage for the metal doesn’t come anywhere near the almost 11,400 tons of physical silver that the trust reported holding at its extremes in late April of this year.

I don’t need to go anywhere near these rumours. The facts about the SLV alone are enough to make a great case for the manipulating effects of the ETF on the price ofsilver (SI-FT36.750.130.35%) and the strong positives those manipulations can deliver to an investor who doesn’t mind being part of a grand plan – as long as it’s a profitable one.

Let’s have a quick look at the mechanics of this relatively new ETF and how it positively affects silver prices. The SLV looks to represent shares with real physical silver, not derivatives nor stocks of silver miners. The mechanism of connecting shares of the trust to the price of real silver is relatively simple.

As investor interest increases, sending shares of the trust higher, BlackRock continues to issue more shares, using that extra cash to buy and stockpile physical silver ingots. The speed with which they will issue shares and increase their physical holdings is dependent solely on how fast the differential moves between the actual price of physically traded silver and the SLV’s share price.

In fund-speak, this is called tracking the net asset value, or NAV, of the fund. If the NAV tracks too high to spot prices, shares go out to satisfy demand for the fund.

And appetites for the SLV have been stunning. Since inception in 2006 and initial stockpiling of 650 tons, the SLV reached its 11,400-ton peak just more than a month ago, an amount that represents almost half of all the silver being globally mined in a single year. Of course this institutional hording system was a tremendous added influence to the price of silver, which recently peaked at over $48 (U.S.) an ounce on April 29.

But what about the last month? With silver’s price losing more than $10 an ounce, shouldn’t the SLV be working in reverse? If shares are normally issued as appetite for silver increases, shouldn’t the number of shares and the stockpiled amount of silver decrease as the retail and institutional investor sell out?

It should and it is, but only to a certain degree. The mechanism of the SLV implies that the fund would never need to sell any of its physical holdings, as long as the cash price keeps up with the share price – or to put it in fund-speak again, if the NAV doesn’t become too discounted.

So as long as appetite for the fund keeps relatively steady even as silver prices decline, the trust can continue to hold the enormous tonnage they’ve accumulated. That’s good for long-term holders and the managers, of course, because silver prices are buoyed as horded stockpiles increase.

Recently, though, retail and institutional appetite did take a dip, but as silver prices swooned, other buyers have come in to take up much of the slack of the share selling that came with it.

But who were those buyers? Conspiracy advocates around the blogosphere won’t be surprised to learn it’s been the investment banks and trust managers themselves – the sales force of the fund.

As evidenced by the 13-F Edgar filings, the four largest holders of the SLV have now shifted hands from large institutional funds and into the hands of Bank of America, Morgan Stanley, JPMorgan and BlackRock themselves.

Besides using cheap funds from the discount window to make these purchases courtesy of Uncle Sam, they also manage to do much of their buying at a discount to NAV, in essence grabbing an immediate advantage compared to spot metal prices. It’s become a tidy game.
And as retail and institutional interest in silver comes back, these banks and investment firms are well-placed to resell their accumulated shares at their leisure, above NAV and directly through their own sales teams inside their supposed Chinese walls.

It might sound shady, but it’s all entirely legal.

The bottom line for the retail investor is that the trust managers and bank sales teams now have organic support from the proprietary desks at their own investment banks – and can almost assure that silver won’t get decimated in a deeper commodity pullback.
It is also true that silver is a miniscule market, and even tiny further interest generated by those sales teams will result in further spiking of prices, despite silver’s already lofty numbers.

I hate to do it, I don’t like the system and it ought to be forbidden – but silver and the SLV look like a one-way street you can’t afford not to be pointed down.

As sign posts go, what do you think?

Regarding The stats and the charts have been updated and are as follows:.

Our model portfolio is up 338.11% since inception

An annualized return of 128.07%

Average return per trade of 40.41%

81 closed trades, 78 closed at a profit

Average trade open for 46.27days

sk chart 22 May 2011.JPG

The above progress chart shows our performance when profits are re-invested, however, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today.

Stay on your toes and have a good one.

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Reader Comments (7)

I loved this:

"Crazy stories has JPMorgan as a puppet of the Federal Reserve."

JP Morgan (the man and his firm) CREATED the Fed under the guise of protecting people from the "money power" no less. What a hoot. People are so gullible.

They ARE the Fed. They manipulate the prices of gold and silver to assist the government in maintaining its fiat money fraud from which Morgan benefits mightily. One hand washes the other. It's very incestuous.

Bottom line: Bankers rule. Make that banksters rule.

June 9, 2011 | Unregistered Commenterfallingman

Please, explain clearly, what you mean by..."you can't afford not to be pointed down."

June 9, 2011 | Unregistered CommenterDel Funk

Yes, a little cryptic. Are you now bearish silver near term?

June 9, 2011 | Unregistered CommenterBB

I am very untrusting of SLV. The short term fluctuations they would report on their metal holdings compared to the difficulty in obtaining large amounts of physical in the short term defies common sense. They won’t “come clean” by opening their books to independent auditors, and I don’t trust JP Morgan. Having JP Morgan as the custodian seems to be like having the fox guard the hen house.

Why not go with PSLV instead? I trust that PSLV has the silver to back the fund. I don’t trust the SLV has the silver to back the ETF. I know they operate in different manners. But if they’re both supposed to track the price of silver…

June 9, 2011 | Unregistered CommenterDave


We read it as a bit of a double negative, so its a positive. So I guess they are advocating that we should be into the ETFs.

We don't own them, but we have used them as an options play in the past.

June 9, 2011 | Unregistered CommenterSilver Prices

It is sad, hoever, what do you mean "you can't afford not to be pointed down " ??

June 9, 2011 | Unregistered Commenteralexander ilnyckyj

While I do prefer PSLV to SLV, an advantage of SLV is that, as noted above, you can trade options on it. For now it’s probably OK, but if the rumblings regarding the “solvency” of SLV ever start to climb higher on the Richter scale, might be time to think about exiting.

June 9, 2011 | Unregistered CommenterDave

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