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What is Happening with the Silver ETF?

Roland Watson
Oct 14, 2005

So what exactly is happening with the anticipated Silver ETF that Barclays Bank filed with the SEC in June? Their proposal to set up an exchanged-traded fund with an initial offering of 13 million shares each representing 10 ounces of silver set the world of silver abuzz but now all seems quiet. You can find the filing for the ETF at this official SEC link.

The alleged problems began when a rumour was reported on the 15th September that the SEC had rejected the filing. The text of the rumour is reproduced below from this link:

The US Securities and Exchange Commission has turned down Barclay's Global Investors application to establish a silver electronic trading fund platform, sources in the market told Platts Thursday. Barclays already have an ETF for gold.

A well-respected industry source said Thursday that there was "speculation in the market that Barclay's application for a silver ETF has been refused by the SEC." A second source told Platts that Barclays had filed the application with the SEC a couple of weeks ago. "I would be very surprised if it had been approved, another UK-based market source, unwilling to elaborate on his statement."

Barclays themselves went immediately on the offensive by denying any claim of rejection and maintaining that the filing was still awaiting approval. They also pointed out that this is a lengthy process having seen their Gold ETF take a year to go from filing to launch.

One could believe either of these claims or more reasonably go for the middle position, which is that it was rejected in the sense of requiring further amendment to calm certain objectors' nerves. However, the market action from the day the rumour came out is interesting. After bumping along at about $7.00 for a number of months, the price has jumped and jumped since that day of Thursday, 15th September 2005. The chart below confirms the "before" and "after" effect of this rumour date.

What can we deduce from this dislocation in price action? Did certain institutional investors get wind of this rumour and put two and two together? That is, this commodity is too illiquid and scarce to be subject to an ETF of 130 million ounces? The coincidence seems too much to dismiss and an ETF rejection or approval is bullish for silver either way. Time will tell, but silver is currently over 10% up in four weeks since the day that rumour came out.

However, looking at the other arrow on the graph, we have to understand that certain other voices were crying out against this ETF. This was most noticeable in the form of the Silver Users Association. Only days before this rumour of an SEC rejection came out, the SUA published their September newsletter containing a "white paper" on their opinion of the ETF.

This included an overview of the depletion of US government silver stocks over the years and the conclusion that a now fragile silver market would suffer if an ETF came in with its disruptive buying power. For good measure they talked about shortages and job losses.

The link is here and should not surprise anyone familiar with this organisation and the silver consuming companies they represent. Indeed, the SUA published essentially the same piece in their previous July newsletter just so we know their fears concerning the ETF. In that later September piece, they ended with this extra text to reinforce their objections to the SEC (with my emphasis added):

"This removal of large quantities of physical silver could have a negative impact on silver-industry specific employment as well as the overall economy, both through job losses and inflation.

The Silver Users Associations supports the buying and selling of silver as an investment. There are already several ways to do so without creating a potentially harmful situation to industry. We don't endorse a silver ETF because of the potential liquidity problems it would create. The SUA urges the SEC to take these issues into consideration before it decides whether or not to issue a silver ETF."

Their concern that this ETF could lead to silver shortages is illuminating and confirmatory of the bullish nature of silver investing. Of course, we have to decode the SUA's pessimistic utterances. What they actually mean is that a silver ETF would lead to a silver price surge not a silver shortage. The silver would still be available to their consuming members, only at a higher price.

It is also ironic to see their white paper talk about the running down of US government stockpiles that they themselves willingly partook of at depressed prices after the USA went off silver coinage. The SUA does not mind silver stockpiles, just so long as they have unfettered access to them!

So, the SUA publishes a condemnation of the silver ETF and a rumour of its rejection comes out days later. Was the SUA leaning on the SEC and lobbying hard in the corridors of Senate and Congress? Did their scare stories of shortages and job losses prove too much for certain politicians? It certainly seems to have had some effect.

We don't know for certain but we do love to speculate. One thing that needs no speculation is that any attempt to suppress investor buying has so far blown up in their faces. Neither are we convinced that the silver ETF is history quite yet.

Either way, it looks bullish to silver to us!

Roland Watson
email: newerainvestor@yahoo.co.uk

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here."

He invites comments and questions at: newerainvestor@yahoo.co.uk.

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