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March 13, 2009

Silver -- Draw the Line
by David Morgan

Recently (3-07-09) I was interviewed on Financial Sense Online, and the discussion revolved around the Silver Exchange Traded Fund (ETF). Mr. Jim Puplava, who hosts the show, asked some piercing questions about the gold and silver ETFs.

Something Jim and I discussed was that Barclays changed the words in the original prospectus from "Silver Bullion" to just "Silver," which reading as a lawyer would, begs the question Why? To me it implies there might be other silver investments that count but are not necessarily bullion.

One benefit I stated early on is that the silver ETF eliminates two major problems of purchasing large quantities of silver.

• Where do I store it once I have bought it?
• How can I buy a large quantity at once in the "physical" market?

But I never will consider it to be a primary silver investment. Knowing that the SLV is ALWAYS cash settled should raise an eyebrow or two. Certainly the SLV was set up primarily for larger institutional types to participate in the silver market. The tax consequences are also something any investor would be smart to determine before making an investment.

On balance it does bring attention to the silver market, has provided much more participation into the metals market, and has a fairly low risk if all you want to achieve is a paper gain. But under no circumstances do I consider it to be a silver investment. It, as with a mining stock, futures or options contract, or anything else that you do not hold in your own hand, is a derivative!

Also, as has been pointed out on the Internet before, SLV added 20M oz of silver to their "inventory" on December 31, 2007, only to remove it on January 1, 2008. Either they hired an entire fleet of armored cars for two days or that silver was a paper scheme all along.

I wish to digress here a bit to say that the Central Fund of Canada does have the real silver and gold they report, but the process of moving a new silver purchase takes time -- lots and lots of time. As pointed out, it is impossible to move 20M oz of real silver that quickly, not with all the checks and balances required -- let alone the manpower and small work space.

James Turk and others have also addressed the unanswered questions about these ETFs in earlier interviews. In fact, when it finally was introduced into the investment arena a few years ago, I asked James to help me with some of the finer points on the SLV.

As many others and I have pointed out numerous times, there are bar lists and the bars are likely real and do exist. During the interview with Jim Puplava, I gave one of numerous possibilities that could put bars into "inventory" and yet still have several claims against them. Again, the issue with them is whether the ETF really owns them free and clear or they are encumbered or otherwise compromised.

Another point is, the SLV can be "shorted" and this silver does not have to exist in inventory.

I have a fantasy about the paper precious metals markets; in my case obviously it would be focused on silver. I imagine myself standing in a large football stadium -- something like the Rose Bowl would do nicely -- and all participants with silver holdings (metal or paper) of one thousand ounces or greater fill the stadium. I draw a line at the fifty-yard line. I take all the silver on paper and place it on the east side of the fifty-yard line; all the physical silver I place to the west of the fifty-yard line. Then I calculate the value of each side.

Guess what! The dollar amounts of the two sides will not match -- not even close -- I guarantee it! There is far more paper silver than physical silver. This can easily be proven and has, by some of my earlier articles and by numerous other writers in this space.

The controversy surrounding the gold and silver ETFs continues and there are proponents both for and against the GLD and SLV. In an effort to remain consistent personally, my original "take" on the silver ETF remains, which is to state that any "investment" involving silver would have an overall positive effect because it would draw more and more attention to both professional and private investors that indeed silver is not only a worthwhile investment but also has all the monetary qualities of gold and has an industrial component that will remain, under any economic conditions.

For a good presentation of differing viewpoints, I suggest reading A Problem with GLD and SLV ETFs, by Trace Mayer, whose interview I conducted in Phoenix at the Silver Summit and will post at a later date. If you are interested, go to http://www.runtogold.com/2008/12/welcome-new-readers/. Trace also prepared an article titled, "Oil Majors Should Just Buy Real Gold,"http://www.runtogold.com/2008/12/oil-majors-should-just-buy-real-gold/.

It is an honor to be.

Sincerely,

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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