Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: regli who wrote (48561)	3/23/2006 8:40:43 PM
From: aknahow	Read Replies (1) \| Respond to of 116555

The Silver ETF - Not So Ironic After All? By Tom Szabo 23 Mar 2006 at 12:56 PM EST CAPS ARE MY COMMENTS NOT SZABO'S What was the most (at least to me) surprising, however, was the brief treatment afforded to what has been expressed as the main concern of diverse parties with conflicting interests in the silver market. I am talking about the Silver User's Association (SUA), Ted Butler and the CPM Group; each of whom made comments against the approval of the rule change on the basis of inadequate physical supplies being available to meet expected ETF demand. SINCE WHEN SHOULD MARKET FORCES BE CONTROLLED TO ASSURE A LOWER PRICE THAN THAT WOULD BE SET BY SELLERS AND BUYERS THEMSELVES? It has similarly been my contention that the SEC was unlikely to approve the ETF for trading unless there was identification of adequate stockpiles of silver to meet the anticipated demand, initially amounting to 130 million ounces of silver. By "initially", I mean the theoretical maximum amount of silver the ETF could accumulate over time, as its popularity grows, before having to file a follow-on registration statement. What does worry me, and this has not been acknowledged by the SEC or AMEX, is that the silver ETF is likely to create continuous, relentless demand for silver in the spot market which will lead to a “dog piling” effect from buyers other than the ETF in a manner similar to what happened in the Hunt episode of 1979-1980 and to a lesser extent when Buffettt made his purchase in 1997-1998. In effect, the transparent, obvious demand for physical silver by the ETF will allow every market participant to front-run the purchase of its silver baskets. UNLESS THE SILVER ETF TRADES AT A PREMIUM TO SPOT SILVER THERE WILL BE ALMOST NO ADDITIONS. BUYING SPOT IN PREFERENCE TO ETF SHARES WILL CAUSE SHARES TO SELL AT A DISCOUNT TO SPOT SILVER. ONLY WHEN BUYERS ARE SO EAGER TO BUY THE ETF SHARES RATHER THAN PHYSICAL SPOT, CAUSING THE SHARES TO SELL AT AT LEAST A 10 B.P. PREMIUM TO SPOT, WILL THE AUTHORIZED PARTICIPANTS BUY SPOT FOR DELIVERY. SO RATHER THAN FRONT RUNNING WE SHOULD SEE THE REVERSE. ... I realized this when it was pointed out to me that market makers may be hesitant to create new ETF shares if there is a even a slight chance of a supply squeeze in the spot market. AUTHORIZED PARTICIPANTS WILL MAKE THEIR MONEY NOT BY SPECULATING ON WHERE SILVER OR THE ETF SHARES ARE GOING. JUST AS BROKERS SELLING AND BUYING GOOGLE FOR CLIENTS CARE LESS ABOUT THE DIRECTION OF THE STOCK BUT RATHER EARNING COMMISSIONS ON TRADES. THE AUTHORIZED PARTICIPANTS WILL EARN BY SELLING SHORT SHARES WHEN THEY ARE ARE AT A PREMIUM TO SPOT, AND REDEMPTION OF SHARES WHEN THEY ARE AT A DISCOUNT. THE PREMIUM NEEDED TO MAKE THE SHORTS AND REDEMPTIONS PROFITABLE COULD BE AS LOW AS 10 BASIS POINTS. In such a case, there is a risk of being naked short the ETF shares with no way to cover. Given the small arbitrage profit margins that an ETF market maker expects to make, the risk of a large trading loss may be unacceptable. SHORTS AND DELIVERIES OF PHYSICAL WILL BE DONE SIMULTANEOUSLY. NO RISK AT ALL! I would like to emphasize that this is not a call to panic or an admonishment against investing in the silver ETF, but nonetheless silver investors should be careful and aware of this surviving silver ETF irony. Shall we see if I can resuscitate any more? THE REAL IRONEY IS HOW ISSUES CAN BE DISTORTED. In any case, taking this discussion much further would be purely an academic exercise. At this point, we (you, me, the SEC, AMEX, SUA, Ted Butler, CPM Group, etc.) are merely making guesses of varying merit. NOT REALLY. SOME HAVE AN INTEREST IN PRESERVING THE STATUS QUO OF BIG SPREADS FROM THE SILVER TRADE. SOME JUST DON'T UNDERSTAND THE ISSUES. I OWN NO PHYSICAL SILVER, NO PHYSICAL GOLD, NO GLD ETF SHARES, BUT MIGHT IN THE FUTURE. OWN A LOT OF P.M. STOCKS BUT MAINLY GOLDS.