If one answered that question by reading the recent press on gold and silver, one might conclude with a resounding “no,” given the “outflow of dollars in various gold and silver funds. But drawing that conclusion, along with a few others we have seen of late, might not tell the complete story. Let’s consider the “bifurcation of the silver market as expressed in this recent article comparing the record purchases of silver coins versus the significant outflows from ETF funds.
By way of background, SLV, backed by JP Morgan, warehouses silver just like SIVR, an ETF Securities Fund (which uses HSBC). The recent dollar outflows of SLV may only have occurred because the fund started earlier than SIVR and investors might have sought an opportunity to take some profits off the table (e.g. the run-up in SLV, because it is an older fund, might explain some of the dollar outflows). SIVR has a cheaper management fee of 30bps (vs 50bps for SLV) and owns physical silver bars audited by an external metal assayer two times a year. We chatted with Will Rhind, head of US operations for ETF Securities, to gain a better understanding of some of the issues involved in the silver market.
MetalMiner: Can you explain why investor dollars have been pouring into silver coins, but leaving ETFs?
Will Rhind: The trend of investors buying silver coins, and gold for that matter, has been strong over the last few years. Buying coins and buying ETFs are two different things. Coins are tangible and have numismatic value, i.e. people may want a coin because it is deemed more collectible or desirable than another. Silver ETFs like SIVR are investment tools and are designed to track the price of silver with minimum premiums and discounts to the spot price. Coins on the other hand can attract premiums on purchase and discounts on sale. As such, coins are not so much investment vehicles but more a medium for people looking to collect or store. People looking to tactically trade the silver market are probably more likely to execute this using an ETF than a coin. Silver coins are cheaper than gold coins.
MM: What does this dichotomy suggest in terms of silver prices going forward?
WR: I think this is positive for silver prices. It shows that the silver market is seeing demand both on the investment side through ETFs and futures and on the physical side through coins and bars. Until interest rates rise and get to a certain level and take some of the attractiveness off precious metals, prices look bullish. When real interest rates remain negative, one is effectively incentivized to go ahead and buy real assets such as precious metals.
MM: What do you see as the short, mid-term and long-term trends going forward?
WR: The macro environment for metals is still positive and nothing much has changed from last year – negative real interest rates in the US and many European countries, large deficit and debt levels in many western economies and the recent quantitative easing programs have relaxed monetary policy and may ultimately lead to inflation. The European sovereign debt concerns of 2010 still linger and may surprise us again in 2011. Global economic growth does seem to be picking up and that may have more of a positive effect on the pro-cyclical metals such as silver, platinum, palladium and copper to name a few.
MM: Can you comment on whether supply shortages exist for silver, as some have reported?
WR: We see no noticeable shortage of silver. Supply fluctuates yearly; however, the availability of silver within the physical market still exists. If people believe the mine supply of silver will fall this year, then some people can extrapolate that into something more extreme. But from our vantage point, we don’t see any signs of a visible shortage.
Those interested in the silver market can attend a free conference Phoenix Investment Conference & Silver Summit on February 18-19, 2011.
Details contained in the referenced link.
MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event: