Will Gold and Silver Exchange Traded Funds Spread to Most Global Stock Exchanges?

By: Julian D. W. Phillips | Mon, Nov 27, 2006
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From www.silverforecaster.com 27th November 2006.

The gold Exchange Traded funds have been the most remarkable addition to the gold market ever seen. The translation of a metal market previously outside the paper markets [except for the mining company shares] into a paper market too, has seen the investment in gold for new time buyers of close to 600 tonne in less than two years. And the show is by no means over, as the World Gold Council [WGC] continues to market and educate fund managers who previously excluded gold mining shares as too high risk. Now the direct access to gold via these shares is bringing them, first time, into this market. With their global investment they are capable, if they took seriously gold in their portfolio, of taking the gold price well above four figures. But to get there still requires a lot of leg work on the part of the WGC, but they are getting there, it seems. To highlight just how much work is needed in both the gold and silver markets, we take a closer look at a more obvious example, that of silver.

The Silver Trust [below] has been as spectacular a market development as have the streetTracks and other World Gold Council gold Exchange Traded Funds. With an initial issued capital of 129 million shares it became clear that this would not be enough to satisfy investors' appetite, so another 150 million shares have been issued. Demand for these shares rises each time silver prices begin to rise.

New Investors
But what is clearly apparent, as with the gold E.T.F.' is that a new investor type has been attracted to the silver market, one not able to enter the silver market before, except as an Investor in silver shares. These carry risks many fund managers are unwilling to carry. With no such risks in the Silver Trust shares, these managers [and individuals] are happy to take good positions in these instruments that they are now comfortable with. The investing power at their hands is far larger than has been seen in the gold or silver markets before. If they moved seriously into the precious metals along this route, the prices of these metals will rise far higher than ever imagined.

The fund manager type of investor is a long-term Investor and one to be found in all the developed and developing parts of the world. However, it is only in the States that the move to the shares of the Silver Trust has really taken place in large volumes.

A similar feature of the gold market is that the gold E.T.F. is only found in the main gold producing and gold selling centers of the world. This leaves the bulk of the globe and amongst them the bulk of global fund managers still beyond the reach of the precious metal Exchange Traded Funds.

What is perhaps the most important work being done by the World Gold Council presently is the presentation to new fund managers of the concepts of the gold Exchange Traded Fund and the advantages to be gained by investing in them, so widening and broadening the size of the gold market. These 'road shows' are bringing new investors to gold each time they go out.

Currency hedge
Additionally, the W.G.C. is overcoming the currency barrier, in that they have just listed the streetTracks gold Exchange Traded in Singapore. This is an additional listing of the U.S. fund [not a separate fund], with the gold being held outside Singapore.

This can remove some of the political and currency risks from investors in risky counties, as their own government will not be able to reach into the U.S. to take the gold in the event of the imposition of Exchange Controls. As the currency world is set to see a decay in the main currency [the U.S.$], this facet of these funds is set to grow significantly, before exchange Controls are contemplated by such governments.

As investors become cosmopolitan [internet, etc] so they appreciate the advantages of going global. If the promoters of these Exchange Traded funds list them in the various Stock Exchanges around the world, they will draw huge volumes of interest into these markets and bring silver and gold into the mainstream of global paper investments.

What applies to the gold Exchange Traded Funds also applies to the Silver Trust. But with silver a larger mountain is to be climbed than gold has.

Gold is a monetary metal now and is recognized as such. Silver ceased to be so many decades ago. Silver is seen as an industrial metal too, so is not quite in the same category as gold. However, if the currency system continues to exhibit structural faults, no doubt silver too will re-join the ranks of a monetary metal and at higher prices. It will have to continue in gold's shadow for the meantime on the investment front.

So where is silver seen as a valuable investment metal right now? And where is it produced?

The following table from the Silver Institute shows that only the States, Australia and Canada of the main silver producers are in the English-speaking, developed world, where the main global Stock Exchanges exist. So the world outside these nations sees silver either as an industrial metal or as a cheaper precious metal, the pale sister of gold.

Top 20 Silver Producing Countries in 2005
(millions of ounces)
1. Peru 102.6
2. Mexico 92.3
3. Australia 77.4
4. China 64.7
5. Chile 44.3
6. Russia 42.2
7. Poland 40.5
8. United States 39.2
9. Canada 34.1
10. Kazakhstan 25.9
11. Bolivia 12.8
12. Indonesia 9.9
13. Sweden 9.1
14. Morocco 7.4
15. Argentina 5.2
16. Turkey 5.2
17. South Africa 2.8
18. Iran 2.6
19. Uzbekistan 2.2
20. India 2.1

Consequently, silver and silver shares that are best known are listed in these three countries. The Spanish-speaking world sees silver as an important precious metal and some of them want it back as money. Silver mines are listed there too, but then the political risk rises to the surface.

The work of marketing the Silver Trust shares is therefore the most important one in developed countries where the markets do not have a silver shares section and where silver is not on the radar screens of Investors or fund managers, such as Europe and the U.K. In producing countries where silver is freely available to the locals, such funds will not have the same success, but in developed nations where the Stock Exchanges are the usual channels of Investment for the institutions and wealthy individuals, such funds or the extensions of funds like the Silver Trust will have success.

But as with gold the rest of the developed non-English-speaking world needs to be educated in the joys of silver, without the risks attendant on silver companies.

Road-shows to Paris and all other developed parts of the world, highlighting silver are desperately needed to ensure that silver reaps the same success as gold in the growth of Exchange Traded Funds.

By following in the slipstream of gold on this one, silver is becoming an investment vehicle through paper shares, with the silver held in safe vaults in key centers. Language or culture is not a barrier, as silver is known across the globe. But we fully expect silver promoters have the task to hand and to be moving down the road taking silver to center stage with gold eventually.

The greatest task out there is simply one of marketing the metal.

HIGHLIGHTS in "Silver Forecaster"
SHARES: HUI, NEM, FCX, NG, VGZ - Gold / Juniors / Explorers Portfolio
1-2. Market Forecasts / Short-term forecasts across the Board!
2-3. Comex Update
3-17. Central Bank Gold Sales in 2006 / Gold E.T.F. / Gold & Silver / E.T.F.' should spread across the world/ The Oil Crisis / Gold: Oil Ratio / Dow Jones / Technical Analysis of the Gold Price: Long / Gold price drivers 2006 / Short term in the U.S. $ / Treasury Notes / CRB Index / Gold and the host countries & Market currencies - Europe - S. Africa - Australia - Canada - Japan - India
15 - 21. Gold Shares & Portfolio

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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