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Dollar loses clout in bullion market
Silver Soars on ETF, But Will Luster Last?
By Myra P. Saefong
CBSMarketWatch
Friday, March 24, 2006
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B64DDD031%
2DBF2F%2D454E%2D87AF%2D01F5F34B04BA%7D&siteid=mktw&dist=
SAN FRANCISCO -- Prospects of an exchange-traded fund have pushed
futures prices for silver to a more than two-decade high, but the
launch of a new investment vehicle may dull some of the metal's
shine.
A silver exchange-traded fund in registration from Barclays Global
Investors took a step closer to its launch Tuesday, when the
Securities and Exchange Commission approved a rule change that would
allow the product to list on the American Stock Exchange.
The ETF's registration statement submitted by Barclays has not yet
taken effect. In other words, the product "hasn't been cleared to be
available to the marketplace," said Barclay's spokeswoman Christine
Hudacko.
However, "with the recent SEC announcement, the chances of the ETF
approval rises to 90%," said Paul Mladjenovic, a New Jersey-based
certified financial planner at PM Financial Services.
And metals-based ETFs have to "have the physical metal in their
possession and that obviously means that they have to buy a lot of
silver," said Dale Doelling, chief market technician at Trends In
Commodities.
The ETF would be backed up by 130 million ounces of silver
initially, according to Peter Spina, an analyst at GoldSeek.com,
just as gold ETFs are backed up by physical bullion kept in storage.
That is about where current inventories on the Commodities Exchange
division of the New York Mercantile Exchange stand.
"We should see the ETF suck up a lot of silver, and this has the
potential to move silver [prices] to the mid-teens this year," he
said.
'We should see the ETF suck up a lot of silver, and this has the
potential to move silver [prices] to the mid-teens this year.'
The market has been gearing up for a launch. May silver prices
touched $10.70 an ounce in New York Thursday -- the highest futures
price since late 1983 -- and they're up around 9% from the end of
February.
At the moment, Barclays is "not in a position to comment on a launch
date because the product remains in a registration review process
and we remain in a quiet period," said Hudacko.
Barclays made its filing on the product nine months ago. On average,
other exchanged-traded funds have taken about 12 months to launch
following registration, Hudacko said. So while they generally see
a "lengthy review process," the silver ETF's has "been rather
efficient in terms of time."
If launched, the ETF offers several potential advantages to the
silver market.
"It's difficult to see how much investment demand will be caused by
this yet, but due to the lack of silver investment products ... this
should attract some good interest," said Spina.
If the silver ETF follows the pattern of gold ETFs, demand should
soar.
Investors put an estimated $550 million into the StreetTracks Gold
Trust ETF on its first trading day on the New York Stock Exchange on
Nov. 18, 2004.
What's more, "global demand [for silver] has moved to a point where
it is greater than new global production," said Julian Phillips, an
analyst at GoldForecaster.com, emphasizing consumption from China
and India.
Add that to the prospects of a silver-based ETF and "you have an
explosive situation," he said.
The silver ETF is really the biggest thing to happen to the silver
market since the Hunt brothers tried to corner the silver market
some 25 years ago, said Jim Wyckoff, an analyst at
TradingEducation.com, referring to the duo that pushed silver to $50
an ounce around 1980.
Phillips said the Hunt brothers' attempt to corner the silver market
decades ago was "unsuccessful."
But "with the ETF on the market, such attempts on the back of
investors like Warren Buffet will have a greater degree of success
than before," he said.
That said, silver analysts do have their qualms about exactly how
the new investment vehicle will influence the silver market.
The market anticipates that "the introduction of the silver ETF
products will add that much more to demand," said Tim Evans, a
senior analyst at IFR Markets. 'The public ... is becoming most
excited about silver just before it enters a downtrend, which will
likely last for at least several weeks.'
But "the volumes of incremental demand are likely to be somewhat
underwhelming," given that each $100 million in additional
investment in a $10-per-ounce metal only translates into 2,000
additional COMEX contracts," he said.
It's also important to note that an ETF in any sector will always be
introduced near a peak price for that sector, said Steven Jon
Kaplan, a senior editor at TrueContrarian.com.
He points out that the best-known closed-end general equity funds --
Salomon Brothers Fund and Adams Express Co. -- were introduced in
1929, "just before the biggest stock market collapse in U.S.
history."
"The public, therefore, is becoming most excited about silver just
before it enters a downtrend, which will likely last for at least
several weeks," he warned.
The introduction of the silver ETF is providing "somewhat artificial
support in the silver market right now," said Trends In Commodities'
Doelling.
In fact, the silver market is already discounting the ETF and the
market is more over bought than it has been in 20 years," said Ned
Schmidt, editor of the Value View Gold Report.
Prices are vulnerable to fall below $9: "Investors should be buying
gold and avoiding silver at the present time," he said.
Kaplan warned that even if silver prices return to their 200-day
moving average --which stood at $8.33 on Tuesday -- "it's going to
be a lot bigger drop than most people are expecting."
And while Doelling doesn't necessarily see lower silver prices, he
does expect gold, which has been underperforming silver recently, to
retake its "dominant role." In that case, "for the more risk-averse
traders, a short silver/long gold spread trade may prove quite
appealing once the launch of the ETF has taken place," he said.
Overall, "the one thing for sure is we'll see higher volatility,"
said TradingEducation.com's Wyckoff.
He sees more upside to silver prices, but the "ride won't be a
smooth one." The silver ETF is a major reason why silver prices have
been rallying, but not the only one, he said.
The strength in silver, as well as copper, is "indicating that the
worldwide economy is growing at a healthy pace [and] demand is going
to get strong for these raw commodities," said Wyckoff.
Indeed, Matthew Parry, an economist at Moody's Economy.com called
the outlook for silver prices and precious metals in general bullish
for the short term, "as their alternative asset value looks set to
continue rising."
The Value View Gold Report's Schmidt argued that the short-term
picture for silver is actually bearish.
If the silver ETF is approved in the next few weeks, "silver will
surpass $12 by late spring and be near $20 by year end."
Even so, "the supply/demand imbalance in silver is supportive of a
view that the price should move to $22 or more in the next four
years," he said.
Kaplan also offered a bearish short-term, but bullish long-term
view. "Silver prices could fall the very day [the silver ETF] comes
out," he said, and prices could fall 20% in as little as four
months.
In roughly 10 years, however, metals prices could be at least double
what they are now and silver could be at triple, Kaplan said.
For now, "the surprise will be how much [silver] drops before it
recovers," he said.
Under a scenario where the silver ETF is approved in the next few
weeks, "silver will surpass $12 by late spring and be near $20 by
year end," said PM Financial Services' Mladjenovic.
Looking even further ahead, "silver will be in the $20-$35 range by
mid-2007 and hit $50 by early 2008. By 2009-2011, silver has a
realistic shot at surpassing $100," he said.
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