Observers concerned that history could be repeating itself
>By Kevin Morrison
>Published: March 29 2006 03:00 | Last updated: March 29 2006 03:00
>>
The squeeze is back on the silver market. Investors' expectations about a new silver-backed investment product have sent it soaring, evoking memories of its past price spikes and falls.
When Warren Buffett, the investor, acquired 111.2m ounces of silver in the late 1990s, the price almost doubled between July 1997, when he first started buying, and February 1998, the month he first admitted he had bought the metal. It later slumped before the recent commodity boom started to kick into gear.
The Hunt brothers, the Texas oil men, tried to squeeze the silver market in the late 1970s and the beginning of 1980, sending silver prices above $50 an ounce before they dramatically fell to earth again.
This time round, analysts are concerned that after silver's recent price surge, demand will suffer and ultimately cause prices to drop in a repeat of history.
Since July, when talk first surfaced that the silver market would follow the gold market by launching a fund that tracks the underlying price of the metal, a vehicle know as an exchange traded fund (ETF), the price of silver has risen more than 60 per cent to almost $11 a troy ounce, a level unseen since 1983.
The Securities and Exchange Commission, the US regulator, last week signalled that it would allow listing rules changes on the American Stock Exchange to allow the listing of the iShares Silver Trust, which is backed by Barclays Global Investors.
The SEC has still to sign a registration statement allowing the shares to be publicly issued, but full approval is expected to be a formality.
In London, a silver ETF is expected to be unveiled in the near future.
Dubai yesterday launched the Middle East's first silver futures contracts.
Precious metals analysts think the $11 an ounce mark for silver will be broken in the short term, but in the medium to long term further prices rises are dependent on the success of the new products.
John Reade, precious metals strategist at UBS, said that if the iShares Silver Trust attracted funds that would represent the equivalent of50m-100m ounces, that would be considered a success.
Much below 50m ounces and it would be viewed as a failure.
The new fund is proposing to list shares that in their entirety would be backed by a maximum of 139m ounces. "There is nothing else talked about in the silver market except the ETF," said Stephen Briggs, metals strategist at Société Générale.
To assess the potential of the silver-backed ETF, a look at the gold-backed ETFs might provide the best guide.
Gold was the first commodity to have its own ETF as a way of broadening its investment appeal.
It was intended as a means of gaining exposure to gold more cost effectively than by buying the physical metal.
Following a slow start when the first gold ETF was listed in Australia in March 2003, demand took off when the New York- listed streetTRACKS was launched in autumn 2004. Demand accelerated again in the second half of last year and into January before slowing in the past two months.
Yingxi Yu, precious metals analyst at Barclays Capital, says that so far this month there has been a net purchase of gold ETFs equivalent to 5.74 tonnes of the metal, down from 19.27 tonnes in February and dramatically down on January's 87.54 tonnes.
Ms Yu says the five-listed gold ETFs have attracted demand equivalent to about 470 tonnes of gold, or about 12 per cent of annual gold demand. For silver to command the same success it would need to attract demand equivalent to about 110m ounces. Mr Reade says that unlike gold, silver does nothave an abundance of above-ground stocks: gold inventories equate to justunder 40 years of demand and silver equates to less than a year.
He says that strong demand for silver ETFs would reduce the amount of silver available to lend to consumers or traders, and could push up leasing rates and in turn cause silver prices to move even higher.
"The silver market is not deep enough to withstand a large inflow of investment, making it vulnerable to a potential price spike," says Mr Reade.
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