General | Feb 03 2006
The story so far: Following the success of the gold exchange traded fund (ETF) which allows investors to buy “shares” in actual gold bullion, Barclays Investment Bank applied to list a similar fund for silver, which has been approved.
The Silver Users Association of the US (primarily jewellers) has been fighting the listing all the way, claiming that the gold experience showed a strong demand for the silver fund was likely to result, which in turn meant Barclays would have to buy large amounts of silver – so large that it would amount to more than present global inventories of mined metal.
In short, SUA believes the fund will price silver out of reach of the jewellery market, which would prompt loss of income, loss of jobs, bankruptcies, and an end to life as we know it. The financial market scoffed at this hysteria, even suggesting that SUA would benefit from silver being back in focus as a precious metal, and that silver mining would again come into vogue.
Through all the debate (several months) the silver price did nothing more than track along with gold as it usually does. If there were to be a sudden explosion in demand, why was it not reflected in the spot price?
Well, now it is. A bit slow off the mark perhaps, but where commentators were expecting the ETF might affect a push to US$11/oz, we are presently talking closer to US$12/oz. Gold is back in an upswing, but there’s no doubting silver has shot ahead of the standard dichotomy. All because the ETF is about to list.
What has also happened is that the silver futures market is threatening to go into backwardation (something astute observer Dennis Gartman predicted some time ago). This means that silver will be behaving not like a precious metal, which is normally in contango (future prices are consecutively higher), but like a base metal (future prices are consecutively lower).
(Gold and silver are deemed to have investment value and can be “borrowed” for hedging purposes – this leads to contango. Base metals are consumables, so why pay more forward if you can buy it lower now and store it – this leads to backwardation.)
Silver dealers refuse to believe their “precious” precious metal could ever go into backwardation, but it is almost there now. The obvious reason is massive spot buying ahead of the expected initial scramble for silver ETF shares upon listing. Once those who want to be set are set, things should quieten down.
Dennis Gartman has been playing for backwardation (buy spot, sell forward) but joins others in believing all the hysteria about the entire world’s silver supply being sucked up in one fell swoop being just that – hysterical. To that end one assumes the backwardation will not be long-lived, but then the demand for the gold ETF did surprise most everyone.
