Silver ETFs: What's Going On?
While investors in silver ETFs are stuffing their pockets with the white metal, prices are going lower -- and they don't seem to mind one bit.
Besides, gold prices have increased more than 7% since their April 16, 2013 low while ETF holdings have declined another 5.83%. Some longer-term, strong-handed buyers such as central banks have been willing to step up and acquire the metal being sold from ETFs, but only at a lower price.
What About Silver?
Silver prices have fallen by more than 50% since their peak at the end of April 2011. ETF holdings of silver, which include those of the iShares Silver Trust (NYSEARCA:SLV) and the ZKB Silver ETF (OTCMKTS:ZKBSF), amongst others, have increased by more than 5% during that period.
The relationship is not contemporaneous, though. ETF holdings lead bullion prices by 28 weeks on average. Once this lead-time is accounted for, we find the partial contribution of ETF holdings to bullion prices since April 2011 has been -0.104, a negative relationship. Restated, while investors in silver ETFs are stuffing their pockets with the white metal, prices are going lower and they do not seem to mind one bit. As investment demand for silver accounted for 15.26% of total demand in 2012, the producers of silver should be more grateful in public to these buyers than they have shown. We all need customers like this.
As the late Marvin Gaye might have warbled, what’s going on? While the gold market has a buyer of last resort, the central banks, which are willing to take mine output and re-bury it in their vaults free from the burden of a profit-and-loss statement, silver lacks such a buyer. The ETF investors in gold are a weak holder in comparison to the central banks. ETF investors in silver are acting as if they are a price-insensitive long-term, strong-handed buyer and are willing to accumulate metal at lower prices.
The behavioral finance crowd should have a field day with this: Investors who should be profit-maximizing and increasingly risk-averse in the face of growing marked-to-market losses are looking in the mirror, seeing a red “S” on their blue body suits, and thinking they can act as scale-down buyers just like the central banks.
Someone should remind the silver buyers that most silver is produced not as the result of dedicated silver mining but rather as a credit to copper or lead and zinc mining. A copper miner that produces 100 ounces of silver for 100 tons of copper focuses on the copper price and simply takes whatever the prevailing price is for silver.
Normally I recoil at the categorization, “smart money.” However, I think I just found its opposite.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.